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The American Prospect - articles by authorenIt’s Not a Skills Gap That’s Holding Wages Down: It's the Weak Economy, Among Other Thingshttp://prospect.org/article/it%E2%80%99s-not-skills-gap-that%E2%80%99s-holding-wages-down-its-weak-economy-among-other-things
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<p>A robotic welding system for Volkswagon car body shells is featured at the Industrial Museum in Chemnitz, Germany.</p>
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<p><span class="dropcap">T</span>he inadequate quantity and quality of American jobs is one of the most fundamental economic challenges we face. It’s not the only challenge: Poverty, inequality, and stagnant mobility loom large, as well. But in a nation like ours, where wages and salaries are key to the living standards of working-age households, all these challenges flow from the labor market problem.</p>
<p>OK, but this is a supposed to be an article about technology. What’s the linkage between technology and this fundamental problem? As a D.C.-based economist who’s been working on the issue of jobs and earnings for almost 25 years, trust me when I tell you that most policy makers believe the following:</p>
<p><em>“Yes, there’s a problem of job quantity and quality, but it’s largely a skills problem. Because of recent technological advances, most notably computerization, an increasing share of the workforce lacks the skills to meet the demands of today’s workplaces. </em></p>
<p><em>What’s more, the pace at which technology is replacing the inadequately skilled is accelerating—think robotics and artificial intelligence. These dynamics explain growing wage stagnation, wage inequality, and the structural unemployment of those without college degrees.”</em></p>
<p>Problem is, most of that is wrong.</p>
<p>Technology and employers’ skill demands have played a critical role in our job market forever, but they turn out to be of limited use in explaining the depressed incomes of today, or of the past decade.</p>
<p>Consider: The demand for college-educated workers has actually <a href="http://www.nber.org/papers/w18901">slowed quite sharply</a> since 2000 and their real wages <a href="http://www.epi.org/publication/why-americas-workers-need-faster-wage-growth/">have been flat</a>. If that fails to surprise you, you may well be someone who’s recently graduated and looked for work. If that does surprise you, you may well be a high-level economic policy maker.</p>
<p>Before I go any further, allow me to assert the following, and not just to inoculate myself, but because I really believe it: Technology is a hugely important force in economies across the globe. Neither I nor any economist I know would question that we should want the most skilled workforce we can get, not to mention the best educated electorate. There’s no question that those with more education earn more than those with less—the college wage premium is as high as it’s ever been. No question that the upward mobility of far too many disadvantaged children is thwarted by unacceptably high barriers to attending and completing college. No question that way too many people lack the skills they need to make it in today’s job market.</p>
<p><span class="pullquote-right">But a number of important new studies show that it’s not technology-driven skill deficits that are depressing wage and job growth</span>. It’s the weak economy, not yet recovered from the Great Recession, it’s persistently high unemployment robbing workers at almost every skill level of the bargaining power they need to claim their fair share of the growth, it’s terrible fiscal policy, it’s large and persistent trade deficits, it’s imbalanced sectoral growth as finance booms while manufacturing lags.</p>
<p>The policy implications that flow from these findings are profound. Improving workers’ skills is obviously insufficient. Supply doesn’t create demand. In fact, there’s <a href="http://www.newyorkfed.org/research/current_issues/ci20-1.pdf">evidence</a> that as demand for college-educated workers has tailed off, they’ve been moving down the occupation scale, <a href="http://www.bloomberg.com/news/2014-03-06/college-grads-taking-low-wage-jobs-displace-less-educated.html">displacing</a> workers with lower education levels.</p>
<p>If we want to improve the quantity of jobs, we’ll have to do more to promote labor demand. We’ll need to worry less about robots and more about austere fiscal policy, imbalanced trade, weak capital investment, and bubbles and busts. If we want the jobs we create to be of higher quality, we’ll have to do more to lift workers’ bargaining power, by enforcing labor standards, raising minimum wages, and leveling the playing field for collective bargaining. Supply-side solutions targeting workers’ skills may well help the targeted individuals, but they won’t help raise the number and quality of jobs.</p>
<h3>Technology and jobs</h3>
<p>The impact of technology on work and wages is and always has been profoundly important. The most popular economists’ theory about how this plays out is “skill-biased technological change,” or SBTC.</p>
<p>The conventional SBTC story is simple. As technology in the workplace evolves, it raises the cognitive demands that employers make of their workers. How that affects individual workers depends on the extent to which they productively interact with the new technologies.</p>
<p>In the econo-mese of labor economics, the relevant terms here are <em>complements</em> and <em>substitutes</em>. If a new machine does what you do but does it for less, you’re a substitute. Not good. But if the nature of your job and the skills you bring to it enable you to use the new machine to produce more or better output than the machine could produce without you, you’re a complement. Tech change is “biased” in your direction. Pass go and collect a hefty paycheck.</p>
<p>Is SBTC a useful model? Over the very long term, yes. Over the near term, it can be misleading. It’s a good telescope and a lousy microscope.</p>
<p>Taking the long view, the complementarity of skill demands and educational upgrading is why, despite the large increase in their share of the workforce, the most highly educated workers still have the lowest unemployment rates. For as long as we have data on occupations, we can observe technologically-induced “occupational upgrading,” that has enabled the increasing share of skilled workers—complements to the process—to be absorbed into the workplace.</p>
<p>Isn’t it possible for technology to displace so many workers that it creates more problems than it solves? What if the technological advances in the workplace flip too many of us from complements to substitutes? The greater presence and improved capacities of computers, robots and artificial intelligence in the workplace have led some to believe that the pace at which technology is displacing workers has accelerated.</p>
<p>Yet here again, evidence is lacking.</p>
<p>There are at least two ways to evaluate this concern about increasing technological unemployment: macro and micro. From a macro perspective, if technology were contributing to more output with fewer workers (more precisely, fewer hours of work), productivity growth would accelerate. In fact, as shown in the figure below, the rate of productivity growth appears to have <em>de</em>celerated in recent years (productivity changes are notoriously jumpy so the figure includes a smooth trend to help reveal the recent deceleration).</p>
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<div class="field-item even">Source: BLS, analysis: Jared Bernstein</div>
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<p>It’s worth remembering that much of what we hear about technology replacing workers is anecdote. Still, there are some pretty compelling anecdotes out there, and given that data is the plural of anecdote, I’m certainly open to the possibility that there’s more here than meets the eye. But as I recently <a href="http://jaredbernsteinblog.com/wheres-the-automation-in-the-productivity-accounts/">wrote</a>, “the robots-are-coming advocates need to explain why a phenomenon that should be associated with accelerating productivity is allegedly occurring at a time when the trend in output-per-hour is going the other way.”</p>
<p>The micro research on this question is particularly interesting. Economist David Autor, along with various co-authors, has taken the most granular look at how tech change is interacting with jobs through the lens of tasks. He breaks these tasks down into three bins: routine, manual, and abstract.</p>
<p>Routine tasks are repetitive and rules-based, like highly repetitive production work. If you stand in the same place and do the same thing at regular intervals on a production line and you haven’t yet been replaced by a robot, you soon will be.</p>
<p>Manual tasks are relatively simple for people but hard for computers. The person who comes into my office to empty the wastebasket appears to be doing a pretty straightforward bit of work, but because I may move the wastebasket around, she ends up doing something—noiselessly and effortlessly identifying the trashcan—that’s easy for her but hard to automate.</p>
<p>Autor provides a nice example of what differentiates these two different kinds of jobs/tasks:</p>
<blockquote><p>Modern automobile plants…employ industrial robots to install windshields on new vehicles as they move through the assembly line. But aftermarket windshield replacement companies employ technicians, not robots, to install replacement windshields. Why not robots? Because removing a broken windshield, preparing the windshield frame to accept a replacement, and fitting a replacement into that frame demand far more real-time adaptability than any contemporary robot can approach.</p>
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<p>Abstract tasks involve high levels of reasoning, mastery of complicated stuff like statistical analysis, and nuanced communication.</p>
<p>Armed with this typology, Autor tackles both ends of the “technological unemployment” thesis and finds it wanting. He finds more techno-complements than substitutes at the high end of the wage/skill spectrum and fewer opportunities for automation at the low end. Repetitive production jobs will continue to go missing, but that’s a very long-term trend. Higher end jobs will continue to complement technology while the inability of computers to replace workers in manual jobs that require “flexibility, judgment, and common sense remain[s] immense.”</p>
<p>That’s jobs. What about wages?</p>
<h3>Technology and wages</h3>
<p>When it comes to wage trends, SBTC is even a less useful tool. Generally speaking, SBTC would predict a fanning out of wages by skill levels, with complementarity, or the skill bias, rising as you climb up the pay scale, and ever-increasing substitutability, or a negative bias, as you go down the scale.</p>
<p>The problem, as Larry Mishel and colleagues at the Economic Policy Institute <a href="http://www.epi.org/publication/technology-inequality-dont-blame-the-robots/">have shown</a>, is that this has not been the actual pattern of wages over the past few decades. Both in real and relative terms, actual wage trends have not moved the way SBTC says they should.</p>
<ul><li>While wages fanned out as SBTC would predict in the 1980s, they’ve generally failed to do so since. For example, mid-level wages fell relative to low wages throughout much of the 1990s.</li>
<li>SBTC would predict that the wage premium of more highly educated workers would continue to rise, yet starting around the mid-1990s, that differential slowed, if not plateaued. This flat trend is inconsistent with the oft-made claim that SBTC is driving post-2000 wage inequality.</li>
<li>SBTC would predict productivity gains would be reflected in the wages of workers with complementary skills to the new technologies. But productivity increases have diverged not just from the real pay of the lowest paid workers, but from those of middle and upper-middle wage workers as well.</li>
</ul><p>David Autor in particular has tried to save SBTC by coming up with interesting ways in which it could still be tapped to explain these wage patterns. Most prominently, he and colleagues argued that based on the tasks-framework discussed above, SBTC in the 1990s was leading to a polarization of both jobs and wages (as opposed to the more linear impact of traditional SBTC: bad for the bottom, less bad for the middle, good for the top). <span class="pullquote-left">Routine production jobs, which tend to pay solid, middle-class wages, got whacked because they’re easily mechanized</span> (so they’re substitutes); manual, non-routine jobs at the low end of the wage scale did better because they’re much harder to automate; and high-end, high-paying jobs did well because they’re complementary to the new tech.</p>
<p>But things moved around again in the 2000s in ways that forced yet a new morphing of SBTC. Polarization was gone, and Autor wrote that the formerly “U‑shaped growth of occupational employment came increasingly to resemble a downward ramp in the 2000s,” with pretty strong growth at the bottom and not much in either the middle or top.</p>
<p>This turns out to be an important analytic problem. Researchers have made interesting and compelling linkages, at least at the micro level, between technology and tasks at work. But they’ve failed to tie these occupational employment trends to wage inequality. Mishel, et al, put not too fine a point on it (my bold): SBTC, polarization, and all that task analysis simply “fail to explain the key wage patterns in the 1990s [they] intended to explain, and provide no insights into wage patterns in the 2000s. <strong>We conclude that there is no currently available technology-based story that can adequately explain the wage trends of the last three decades.</strong>”</p>
<p>If you have to bend a theory like SBTC that much to explain the changing reality of wage trends over the past few decades, it’s probably not the right one. It clearly helps explain the long-term absorption of so many more college-educated workers, and that still secures the theory a place on the economics mantelpiece. But it doesn’t explain much about wages.</p>
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<p><span class="dropcap">S</span>o, what can economics tell us about the impact of technology on jobs and wages?</p>
<p>While I still think that the long-term positive correlation between technology and skill demands will eventually reassert itself, right now we’re going through one of the rare periods when the evidence for it is especially elusive. Indeed, in the 1990s, it appears that employers over-estimated the complementarities between computer technology and high-skilled workers. We were still working off a tech-hiring bubble when the other bubble—in housing—burst in late 2007. Such an explanation tells you a lot more about bubbles and busts and their impact on jobs and wages than technology stories do.</p>
<p>Second, based on the macro and micro evidence presented above, I’m a lot less worried about the threat of automation than I am about the threat of bad policy that fails to offset the imbalances in demand, trade, income and opportunity. The automation threat is always a possibility and it demands attention. But the absence of a progressive economic policy agenda is a reality, not a threat.</p>
<p>Finally, EPI is right. The technology stories economists tell us fail to fit the wage data—which means we’ve got to get beyond skill solutions as our favored response to inequality and stagnation.</p>
<p>That’s not to disparage more and better education, which remains critical, especially to those who face ever-higher access barriers.</p>
<p>But with great respect for the very smart phone in my pocket and the computer I’ve been staring at for the last few hours, if we fail to deal with the lack of bargaining power suffered by workers across the spectrum of wages and skills, the bubble and bust cycles that have defined the macroeconomy in recent decades, the erosion of labor standards, the austere fiscal policy, the sectoral imbalances, and the absence of full employment, too many of us will continue to experience eroding living standards—regardless of technological progress.</p>
</div></div></div>Tue, 07 Oct 2014 05:49:43 +0000220981 at http://prospect.orgJared BernsteinChildren of the Great Collapsehttp://prospect.org/article/children-great-collapse
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<p><span style="line-height: 1.538em;">Here’s a piece of good news of which you might not be aware: The U.S. safety net performed a lot better than you thought during the recent downturn, which was the deepest since the Depression. Thanks to expansions to the Child Tax Credit, the Earned Income Tax Credit, food stamps, and unemployment insurance—all beefed up by the $840 billion Recovery Act—the safety net almost wholly mitigated the rise in child poverty. Even middle-income households saw most of their income losses substantially offset by tax and transfer policies that sharply ramped up to help them.</span></p>
<p>That’s the good news. The bad news is that most of the Recovery Act’s outlays have now been spent, and pressure to reduce deficits leaves other spending on children and families under assault.</p>
<p>While the safety net performed well during the worst phase of the downturn, other trends have been troubling. Families lost trillions of dollars in home equity, the largest source of wealth for working- and middle-class households. Long-term structural inequality persists, so the modest economic growth that has returned since 2010 is eluding most families. Budget battles are threatening both the basic anti-poverty outlays and the investments in children and families that could help push back on inequality and its impact on opportunity.</p>
<p>Progressives did well, at least during President Barack Obama’s first two years, at expanding the safety net during a serious economic emergency, using taxes and income transfers. But they have not done well in addressing the long-term trend of an erosion of “primary” income, namely wages and salaries. This leads to a paradox: A lot of people get help in a deep recession, but their incomes and life prospects stagnate during relatively good times. Looking forward, both the safety net and measures that might improve the primary income distribution will be under increasing attack from pressures to cut the budget deficit. In fact, there are plenty of strategies that could help reconnect families and children to restored economic growth, but policy is pushing in the opposite direction.</p>
<p> </p>
<h2><strong>The Safety Net Grows, Then Shrinks</strong></h2>
<p>As officially measured, from 2007 to 2010, child poverty went up four percentage points, from 18 percent to 22 percent. But the official measure is incomplete, as it leaves out many income (or near-income) benefits that ramp up when the economy goes south. In the chart below, the flat red line is an alternative measure that includes tax credits and non-cash benefits that largely offset the increase in child poverty.</p>
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<p>Specifically, these benefits include food stamps, refundable tax credits, and health-care assistance, all of which were expanded temporarily by Recovery Act provisions (unemployment insurance was also extended, but that income is counted in the official rate). Analysis by my colleagues at the Center on Budget and Policy Priorities finds that the safety net, including the Recovery Act expansions, “lifted 40 million people out of poverty in 2011, including almost 9 million children.”</p>
<p>Together, the EITC and Child Tax Credit moved 7.9 million people—of which nearly 4.1 million were children—out of poverty in 2011. Expansions of these credits kept another 1.5 million out of poverty, including 800,000 children. Unemployment-insurance benefits, boosted by expansions in their duration and level, kept 3.5 million people above the poverty line, including nearly 1 million children. Food stamps, now known as the Supplemental Nutrition Assistance Program (SNAP), kept 4.7 million Americans, including 2.1 million children, out of poverty in 2011 and are particularly effective at keeping children out of severe poverty<em>—</em>that is, below <em>half </em>of the poverty line. In 2011, SNAP lifted more children—1.5 million—above half of the poverty line than any other program.</p>
<p>CBO data also shed interesting light on how the safety net worked in tandem with the tax system. Federal tax liabilities, which are progressive, fall in recessions. Income transfers, meanwhile, didn’t just help the poor but reached into the middle class. Wage and salary income for households in the middle fifth fell $6,000 in just two years, from 2007 to 2009 (in 2009 dollars). But federal tax payments fell $2,300 (a reminder that progressive taxation has an automatic stimulative function), and transfers, mostly unemployment insurance, went up $2,800, offsetting about $5,000 of the $6,000 loss.</p>
<p>In other words, the data make a solid case that the policies we’ve put in place over the years, in tandem with Keynesian expansions to meet the deep recession, worked well. But when you combine this perhaps underappreciated information with the well-known long-term stagnation of middle- and low-income working families’ incomes, we end up with the anomaly: A lot of folks get some insulation from the downturn but stagnate in the upturn.</p>
<p>It’s as if a bunch of us live on little boats, trying to make our way on a river. It used to be that if you spent some time caring for your vessel, making sure the sails were strong, and putting some muscle into the oars, you could gain some distance. In fact, the current helped move you and your crew in the right direction. The occasional storm would send you off course, but you could get back in the current once the storm passed.</p>
<p>Nowadays, the current seems to flow in the other direction, and the little boats don’t get far even in calm weather. Yet when a storm hits, you might not get pushed back as far as you used to. You just kind of stay where you are, in good times and bad. Except for the yachts, which keep getting bigger, rocking the rest of us in their wake as they rumble ahead.</p>
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<h2><strong>What’s Next?</strong></h2>
<p>Now that the official recession is in the rearview mirror and the Recovery Act has faded, the policy agenda coming out of D.C. has been uniquely horrible. Fiscal policy has focused largely on spending decreases targeted at the budget deficit, to the detriment of the jobs deficit. An interesting exception to the austerity consensus is the Federal Reserve, which has been doing its part to stimulate job creation and bring down unemployment. But the Fed is fighting fiscal headwinds caused by the expiration of the payroll tax cut and the sequester, which together could shave as much as 1.5 percent off the growth of gross domestic product this year, costing us hundreds of thousands of jobs.</p>
<p>Moreover, the budget reductions that have been made already strike not at the factor placing the most pressure on the long-term budget deficit—the growth of health-care costs—but at so-called discretionary spending—a part of government spending that targets inequality and promotes opportunity.</p>
<p>Republicans and many Democrats agree that spending must be cut. While the president’s new budget offers a grand bargain that reduces Medicare and Social Security outlays in exchange for new tax revenues, thus far almost all the reductions have come from the discretionary parts of the budget. That includes programs like Head Start, WIC (the nutritional program for low-income pregnant mothers), child care, and housing subsidies. State and local support for education and related services that help children and families have been on the chopping block, and worse is ahead.</p>
<p>How did we get here? The Budget Control Act—the deal that grew out of the debt-ceiling standoff of 2011—took $1.5 trillion over ten years from the discretionary part of the federal budget. The $1.2 trillion sequester, of which $85 billion hit in fiscal year 2013, reduces mostly the same part of the budget, about half in defense and half in discretionary domestic spending.</p>
<p align="left">The threat to domestic discretionary spending is acute, because it has almost no defenders and lots of defunders. Even the White House brags that President Obama’s budget will reduce such spending will on the final compromise. Though the caps imposed by the Budget Control Act are already too binding, the president offered House Speaker John Boehner yet another $100 billion in domestic-discretionary cuts during their fiscal-cliff negotiations, a cut that’s now part of the president’s budget.</p>
<p>Two other factors place even more pressure on the anti-poverty, pro-opportunity parts of the budget. First, the spending cuts mandated by sequestration are now built into the budget baseline for the rest of the year (through the end of September). Second, Representative Paul Ryan’s House Republican budget lays out a draconian vision of the future from the perspective of low-income programs.</p>
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<h2 align="left"><strong>The Consequences for Children and Families </strong></h2>
<p><strong><em>Head Start:</em></strong> The sequester is just now beginning to reduce Head Start slots. The National Education Association estimates that about 50,000 preschool students will ultimately lose out on the program, and recent anecdotes are downright scary. News reports from Indiana tell of random drawings “to determine which three-dozen preschool students will be removed from [Head Start], a move officials said was necessary to limit the impact of mandatory across-the-board federal spending cuts.”</p>
<p><strong><em>Pell Grants:</em></strong> This tuition-assistance program, expanded under the Recovery Act, is exempted from the sequester, but the Ryan budget goes after it big-time, freezing the maximum award for ten years with no adjustment for cost inflation.</p>
<p><strong><em>Local Education:</em></strong> About a third of non-defense discretionary funding is grants to states and localities, and a quarter of those funds support local education, ending up at elementary and high schools and targeting kids from lower-income families and kids with learning disorders. Some of these resources also support Head Start teacher training and smaller class sizes.</p>
<p><strong><em>Nutrition Programs: </em></strong>The WIC program provides food, counseling, and health-care referrals to low-income pregnant women, new moms, their infants, and kids under five. According to CBPP estimates, sequestration could result in 575,000 to 750,000 women and children losing WIC eligibility this year.</p>
<p>While food stamps were exempt from sequestration, the Ryan budget cuts $135 billion from the program—almost 18 percent—and converts it to a block grant, meaning it won’t be able to expand in recession (as noted above, SNAP helped immensely in the recent downturn). If these cuts were implemented solely by decreasing eligibility, about 12 million people would have to be removed from the food-stamp rolls.</p>
<p>Sequestration is likely to lead to the loss of housing vouchers for 100,000 low-income families. Close to four million long-term unemployed workers will lose about $130 per month—about 11 percent—from their unemployment insurance benefit. Under Ryan’s budget, Medicaid would suffer the same block-granting fate as SNAP, with funding cut by one-third and coverage lost for tens of millions, and that’s not counting the low-income people who would lose Medicaid coverage due to Ryan’s repeal of the Affordable Care Act.</p>
<p>But you get the point: Between tight-and-getting-tighter caps on non-defense discretionary spending, sequestration, and the threat that the Ryan budget will become a touchstone in this debate, not only will our highly functioning safety net be compromised but less advantaged families will lose the services that can give them the lift they need in good times—the preschool, the training, the college access that can help them claim a bit more of the growth.</p>
<h2 align="left">The Stimulus Peters Out but the Downturn Continues</h2>
<p>Meanwhile, federal support through the stimulus for states and localities, an important lifeline during the downturn, had largely faded out by late 2011, and the pressure on state budgets has led to hundreds of thousands of laid-off public-sector workers. Even while state revenues have begun to grow again, they still face a budget shortfall of around $55 billion this year, down from about twice that amount last year.</p>
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<p>The figure below provides one clear example of this trend. The Recovery Act’s aid to states offset as much as 40 percent of state budget shortfalls, through both a State Stabilization Fund (mostly for educational assistance) and through Medicaid assistance (and since those dollars are fungible, states used them to support not just health but other services too). But as the figure shows, after peaking in 2010, they are essentially gone now. As far as children are concerned, outside of Pell grants and the extensions to refundable credits and unemployment insurance, most other Recovery Act programs (or bump-ups to existing programs) are fading or expired as well. The act’s increase in SNAP benefits will expire at the end of this year, costing families of three around $250 per year. The jobs program subsidized by Temporary Assistance for Needy Families was a great bang-for-the-buck employment program that led to employment for hundreds of thousands of low-income parents, but it is now long gone. And while extra Recovery Act spending on Pell grants, Head Start, and unemployment insurance is still in place, those programs are all facing cuts, either from the act’s expiration, the sequester, or generalized budget austerity.</p>
<p>Of course, stimulus spending is, by definition, temporary. But despite the widely heard critique that the problem with the Recovery Act was that it was too small, a more precise criticism is that it didn’t last long enough. Given the depth and length of the downturn, the definition of “temporary” needed to be extended.</p>
<p>These shortfalls have been acutely felt in classrooms at all levels. According to recent work by my CBPP colleagues, K-12 school funding has not yet recovered its pre-recession level and 35 states are providing less funding per student than they were in 2008. In 17 states, those cuts surpass 10 percent in real dollars. Higher-education spending is down almost 30 percent per student, about $2,300 in 2013 compared to 2008. When public colleges and universities lose funding at these magnitudes, tuitions rise sharply (up 27 percent at four-year public colleges over this period) and services get cut, including faculty positions, course offerings, campus access, and library services.</p>
<p> </p>
<h2><strong>What Should We Be Doing?</strong></h2>
<p>Too many policymakers on both sides of the aisle, unfortunately, have bought into the premise that deficit control is a symbol of serious governing. That may be so during normal times, but not in a prolonged downturn. Since Republicans have been somewhat successful in fighting back against tax increases (the deficit savings achieved thus far have been $2.30 in spending cuts for every $1 in new tax revenue), most of the pressure comes on the spending side of the equation.</p>
<p> I can tell you from my own stint in the Obama White House that one powerful interpretation of the 2010 losses for Democrats was that the people wanted their government to turn from stimulus to deficit reduction, regardless of the wrongheaded economics of that premature pivot. The president, to his credit, often says forcefully that deficit reduction alone is not a growth plan and that reducing debt won’t bring down the unemployment rate. But he is stuck in the cramped budget politics of Washington, and the implications of his rhetoric are awfully hard to see in his budgets. As noted, in his new 2014 budget proposal, he offered to go even deeper into domestic discretionary cuts.</p>
<p>Leaving aside the limits of current politics, it’s important to emphasize the policies that we should be pursuing, not just in the downturn but also in the expansion. What types of measures might help give families and kids a fighting chance at claiming more of the economy’s growth? Just being bold enough to call for such policies can alter the dynamics of debate.</p>
<p>On the issue of child poverty, research points to two promising ideas targeting economically disadvantaged families with young kids, one of which is in place and another that’s in the president’s new budget: income support and quality preschool.</p>
<p>Poverty researchers Greg Duncan and Katherine Magnuson tracked poor children into adulthood and found that income supports to their families when they were younger than five were associated with both better school performance and better job and earnings outcomes later in life. Moreover, increments to income are uniquely beneficial to kids in poor families: “For families with average early childhood incomes below $25,000, a $3,000 annual boost to family income is associated with a 17 percent increase in adult earnings [and] 135 additional work hours per year after age 25.”</p>
<p>The Earned Income Tax Credit and the Child Tax Credit can combine to add considerably more than $3,000 for working parents with a couple of kids. One problem, however, is that the unemployed suffer a double loss—of their jobs and of supplemental income, such as the EITC, that is tied to work. We need income supports for the families of unemployed parents as well. The fiscal-cliff tax deal somehow managed to permanently lock in 80 percent of the Bush tax cuts, but these refundable tax credits for the working poor were only locked in for five years (though the president’s budget proposes to make them permanent). Protecting them is a critical progressive goal.</p>
<p>President Obama’s universal preschool proposal is smart and overdue, though one is hard-pressed to see how it grows out of the highly constrained budget debate we are having. A large body of research shows both how important quality preschool is for later outcomes and how its returns over a lifetime far surpass its costs. In his State of the Union address, the president cited the well-documented finding that $1 of investment in good preschool returns $7 of benefits. These results are particularly strong for kids from less advantaged backgrounds. While the president’s proposal is nominally universal, it is intended to be free only for kids from families with modest incomes, below two times the poverty line—about $45,000 for a family of four with two kids.</p>
<p>One can—and should—argue the case for quality preschool for all on equity grounds. The outlays of affluent parents on high-quality preschool show that they know how important this is. A program of the type the president appears to have in mind could cost $5 billion to $10 billion a year, which is a bargain given the net benefits. But under the budget rules, you can’t “score” prospective benefits that are years down the road. And of course, in the spirit of the times, the president asserted that his proposal wouldn’t add “one dime” to the budget deficit.</p>
<p>That means he needs what Beltway budget mavens call a “payfor”—some tax increase or spending cut elsewhere that will cover the cost of the new program. His new budget proposes to pay the cost with higher tobacco taxes, likely as heavy a lift as any other conceivable offset. But in an economy in which so much inequality is sapping so much opportunity from so many kids, it’s hard to think of a better cause.</p>
<p>Finally, there’s macroeconomic policy. In the current context, we might as well be bold and call it full-employment policy. In decades of carefully watching poverty and income trends, the only time I saw middle and lower-income families get ahead, in the sense of their income growing apace with productivity, was in the latter 1990s, when the unemployment rate was so low that employers had to increase compensation to attract and keep the workers they needed.</p>
<p>Thanks in part to the austerity movement sweeping across advanced economies, we’re far away from full employment. But as the economy finally works through the excesses that brought us the deep recession, will the private labor market create the quantity and quality of jobs that we need? For reasons that go beyond my scope here, having to do with advances in laborsaving capital technology, I fear not.</p>
<p>Yet, there’s a lot to be done in America. Our lagging social investments have the potential to provide jobs for people of varying skill levels, while boosting the nation’s productivity. At some point, we’ll get to these investments. The current expansion—if we don’t strangle it with austerity economics—is an opportune moment for productivity-enhancing social investment to help move the economy closer to full employment. We must protect the safety net so it can perform as well in the next downturn as it did in the last. But we can’t stop there. We must build an economy not only in which working families don’t fall behind in bad times but also in which they get ahead in good times.</p>
</div></div></div>Wed, 29 May 2013 12:45:35 +0000217831 at http://prospect.orgJared BernsteinWhat Is McCain's Economic Agenda?http://prospect.org/article/what-mccains-economic-agenda
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p><a href="http://www.prospect.org/cs/articles/election_08"><img vspace="5" hspace="10" align="left" alt="" src="/galleries/img_articles/Elec08_MedButton.JPG" /></a></p>
<p>Next time you catch a John McCain interview, watch for what, at least to my ears and eyes, is a fascinating, albeit subtle, shift. When he's talking about almost anything other than the economy -- foreign policy, the war, Congress, immigration -- he exudes the typical confidence of a veteran Washington player. He deftly shifts the question to his turf, he ardently hits his message points ... just about what you'd expect, actually. </p>
<p>But when the topic turns to the economy, his whole demeanor changes. His body language becomes uncomfortable; he almost seems to shrink a little. His edgy smile becomes forced, his words a bit -- sometimes more than a bit -- hesitant. Putting aside your views on his positions and evaluating his performance on form only, when he's on the other topics, he's a basketball player driving the lane. On the economy, he's looking to pass ASAP. </p>
<p>In economic discussions, he makes mistakes, both small and not so small. He famously admitted that economics is not his strong suit, though he assured us that he owns Greenspan's book. I've heard him speak of the "alternate" minimum tax (it's "alternative" -- can you imagine Hillary getting that wrong?). In a recent interview in <i>The</i> <i>Wall Street Journal</i>, he was unaware that his Web site endorsed a different plan regarding Social Security than the one he was touting to the interviewer. It's hard to imagine a discrepancy like that regarding the war. </p>
<p>He missed the current downturn -- though he's far from alone on that count -- by a long shot, stressing the strengths of the economy's "fundamentals" as recently as January (now he apparently believes we're in or headed for a recession but still can't resist the "strong fundamentals" nonsense). </p>
<p>McCain's answers to questions regarding the policy responses to the current downturn are way off base, far worse than you'd get from say, Secretary Paulson or even Bush. In a recent <i>Wall Street Journal</i> <a href="http://online.wsj.com/article/SB120431596193503527.html?mod=Leader-US">interview</a>, when asked what measures would best deal with the current downturn, he touted making the Bush tax cuts permanent in 2010 and cutting corporate tax rates. Other than Larry Kudlow and <i>The Wall Street Journal</i>'s editorial page, I can't imagine many folks would be inspired by that plan. </p>
<p>So he isn't exactly Adam Smith. But I still think there's a lot for the electorate to consider regarding McCainonomics. Given his predilection to follow the George W. Bush agenda, some critics have labeled him "McSame," attempting a guilt-by-association strategy. There's a lot to be said for that strategy. His voting record reveals him to share Bush’s deregulatory zeal, but I don't think it's that simple. </p>
<p>In his heart, I think candidate McCain wants to fundamentally alter the economic landscape of government's role in the economy by deeply cutting non-defense spending, from discretionary programs to entitlements. He gets there not because he's heartless but because that's the unforgiving combination of his arithmetic and his ideology. </p>
<p><b>He's Not a Mathematician</b> </p>
<p>Perhaps one shouldn't expect candidates' numbers to add up. Tally up Clinton and Obama's expenditures on health care and tax cuts and you will find that they both spend more than they raise. But McCain's numbers are out of whack by orders of magnitude beyond those of either Democratic candidate. </p>
<p>Here's the gist of it: Despite his earlier opposition, he now wants to make the Bush tax cuts permanent. Price tag: more than $2 trillion over 10 years. He wants to repeal the alternative minimum tax. Price tag: "up to $2 trillion" according to the Center on Budget and Policy Priorities (CBPP). He wants to keep the war going ad infinitum, at a cost of between $100 billion and $150 billion per year, according to CBO estimates. </p>
<p>Then there is his health-care plan, which ends the employer tax exemption for the cost of covering employees, and uses the proceeds to subsidize the purchase of health coverage in the private market. The costly part has to do with the poor, the old, and the sick. As health economist Jon Gruber noted, "his plan will require huge subsidies he's not talking about." </p>
<p>Oh, and did I mention he wants to cut the corporate tax rate too, from 35 percent to 25 percent, and allow businesses to fully write off capital investments as soon as they make them? </p>
<p>Bob Greenstein, the director of the CBPP, is not prone to hyperbole. But he called McCain's program "one of the most fiscally irresponsible plans we've seen by a presidential candidate in a long time." According to Len Burman of the Brookings Institution's Tax Policy Center, McCain's tax cuts would shrink federal revenues by 25 percent over 10 years, at which point they would account for about 15 percent of GDP, compared to 19 percent last year. </p>
<p>Now, I understand that this is absolutely sweet music to the ears of the Grover Norquists of the world—the "starve the beast" contingent. But let's play all this cutting out a bit further, turning to the spending side of the equation. Note that McCain made the "no new taxes" pledge, though he recently backtracked slightly. (He told <i>The</i> <i>Wall Street Journal</i>, "I'm not making a 'read my lips' statement … but I'm not saying I can envision a scenario where I would [raise taxes], OK?") </p>
<p>For all of his nervousness around economic issues, when McCain moves into "government-waste, spend-cutting mode" he relocates his mojo. He has clearly seen the government waste money over his long tenure, and he clearly doesn't like it. I don't either. But the cuts he has articulated don't even start to begin to commence to fill the budget hole he creates. </p>
<p>His most common target is earmarks -- those provisions quietly embedded in legislation to steer funding to some desired project or constituency. But there are two problems here, one big, one little. The big one is that the total earmark bill is much too small to pay for even a tiny fraction of McCain's agenda. Most estimates score them at around $20 billion per year, though the McCain folks say they can get up to $60 billion. That's a few months in Iraq, John. </p>
<p>Second, of course it's the case that there are lots of earmarks that should go, and that the process should be much more transparent. But once it is, we will find out that a number of these projects are important and worthy. McCain himself was cutting up recently about an earmark to do research on bear DNA: "I don't know if it was paternity issue or criminal, but it was a waste of money." Problem is, <i>The</i> <i>New York Times</i> pointed out that scientists were doing the research to estimate the bear population, "a prerequisite for sensible administration of the Endangered Species Act." I'd bet you that for every 10 "bridges to nowhere" there are at least a few of these good earmarks (a friend of mine promotes earmarks for the Special Olympics and cancer research). </p>
<p>So, let's review. McCain is shaky on economic policy, has quite massive plans to cut taxes while kicking up spending on health care and the war, is loathe to raise taxes, and is articulating only tiny spending cuts. Or is he? <b><br /></b></p>
<p><b>He's a Deep Cutter</b> </p>
<p>John McCain, along with his top economic adviser, economist Doug Holtz-Eakin, talk a lot about "entitlement reform." What does this mean? </p>
<p>First, let me say that I am a huge admirer of Holtz-Eakin, an economist and former CBO director who is congenitally incapable of cooking books or spinning numbers. I suspect that's one reason why he and McCain appeal to each other (yes, the "straight-talk express" has been off track lately, but I think McCain actually has a pretty low tolerance for economic spin). And both of them must know that they can't implement their agenda without deep cuts, both on non-defense, domestic spending, and on entitlements, especially Medicare. </p>
<p>As Holtz-Eakin put it a few years ago in an opinion piece for <i>The</i> <i>Washington Post</i>, a serious fiscal approach "should rethink the package of support for old-age medical care, long-term care services and retirement income." </p>
<p>Much like the material on McCain's Web site, that sounds innocuous enough. It also has the benefit of being true. Absent a "rethink," Medicare will swamp the federal budget. This increase in health spending as a share of government spending is itself a symptom of the unsustainable rise in economy-wide health-care costs, i.e., this is not exclusively a "Medicare" or public-sector problem. (Social Security poses less of a fiscal challenge; it can be put on a sound funding basis with a few reasonable changes.) </p>
<p>But here's the rub: words like "reform," "rethink," and "making tough choices" sound a lot different than words like "cut, and cut deeply." Holtz-Eakin has integrity, and he likes his numbers to add up. He knows that they can't do what they say they're planning to do without going after entitlements big time. As he put it the other day in <i>The Wall Street Journal</i>, "You can't keep promises made to retirees" (to be fair, he also noted that "you can pay future retirees more than current retirees"). </p>
<p>In fact, you can keep those promises. It won't be easy, and he or she who chooses to do so will need the vision to make the case, along with the political skill and will to make it happen, part of which is about reintroducing competence and faith in government. That means ending the war, raising the revenues needed to meet social needs, and reforming the health-care system with an emphasis on risk-pooling and cost controls. </p>
<p>When it comes to economic stewardship, this election is truly a fork in the road. There are surely those who want to travel McCain's route, deeply cutting the size and obligations of the federal government in order to pay for tax cuts and war. But I think there are more of us who recognize that this path is a dangerous one. </p>
<p>We've seen the outcome of Bushonomics. Its inattention to good government and its deregulatory zeal are evident from Katrina to Iraq to the current recession. Its reverse Robin Hood tax policies have exacerbated market-driven inequalities. Yet, much to some conservatives chagrin, Bush was never willing or able to pursue a true slash and burn approach to fiscal policy. His privatization plans failed, he laid nary a finger on the entitlements (other than to expand Medicare), and his tax cuts will not be made permanent by the time he leaves D.C. </p>
<p>As I see it, McCain wants to change that. He may come across as fumbling in interviews, but to see where he is headed, you have to blend an understanding of his campaign platform, his advisers, and his ideology. What you're left with is a plan to considerably shrink that part of government that functions to enhance economic security at a time when we arguably need a lot more of it. </p>
</div></div></div>Mon, 17 Mar 2008 16:40:02 +0000147063 at http://prospect.orgJared BernsteinThe Economic State of the Unionhttp://prospect.org/article/economic-state-union
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>It’s no picnic for a president to present the State of the Union address when the economy is teetering on recession. In normal economic times, standard procedure is to tout the great economy and his role in its success. Though Bush can spin the economy with the best of them, even he, to his credit, didn’t do much of that last night (there was, of course, some spin, exposed below). </p>
<p>Early on, he cited wage stagnation, slowing job growth, and "concern about our economic future" taking place "at kitchen tables across our country." These were all presented in gilded phrases ("Wages are up, but so are prices for food and gas," which is one way to say real wages are down; they fell about <a href="http://www.epi.org/content.cfm/ib240">1 percent</a> for most workers last year). But for once, Bush recognized that the extent of economic anxiety among American families was high enough that he could not fall back on platitudes about "strong fundamentals." </p>
<p>To address the shaky economy, the president stressed bipartisan efforts by his team and House negotiators on the $150 billion stimulus package. He then signaled to the Senate, in so many words, not to "load up the bill" and slow the process. </p>
<p>(Though details just started trickling out, there is reason to worry that the bill could be in trouble, because the Senate changes are quite extensive. Some are very good: the extension of unemployment benefits, for example. Also, the rebates will reach some poor elderly persons left out of the House bill. But the rebates appear to no longer be capped and thus may be less effectively targeted.) </p>
<p>There wasn’t much else for the president to say about the economy. He couldn’t point out that most families were better off than when he gave his first SOTU address. Median family incomes are actually just about where they were in 2001. He did brag about a record 52 months of job gains, but with unemployment on the rise I can’t imagine this reached many listeners. </p>
<p>It’s also the case that the Bush jobs record is uniquely weak. I hope this isn’t the case, but I suspect we are near the end of the current business cycle, i.e., a recession is either underway or soon will be. Over the last three cycles -- the 1970s, 1980s, and 1990s -- job growth was 17 percent, 21 percent, and 21 percent. Over this cycle, at least through last month, it’s been 4.5 percent. Add that observation to the fact that income inequality increased faster over the last few years than over any period since 1979 -- poverty was higher in 2006 than in 2000 -- and it becomes a no brainer as to why the president doesn’t get a lot of love on the economy, at least from the bottom 80 percent or so. </p>
<p>So, it makes sense that, beyond pushing the stimulus package, he had little to say about the economy. The fact is, Bushonomics -- which I’d characterize as large supply-side tax cuts, deregulation, with no regard to fiscal constraints -- has failed, and that is important for two reasons. </p>
<p>First, I could be proven wrong, but I’m confident that the Bush tax cuts will not be made permanent. He called for that again tonight -- no surprise -- and even offered a misleading statistic, suggesting that allowing the cuts to sunset as planned would raise the taxes of 116 million people by an average of $1,800. Of course, the tax cuts were so heavily tilted toward the rich that a broad average like this is not at all representative of what the typical, middle-class family would face. In fact, they’d pay less than half this amount. But it’s also worth noting that the supporters of sunsets, largely Democrats, are very careful to stress that they plan to preserve the middle-class tax cuts. I'm not saying this is great tax policy, though it's probably reasonable election-year tax policy. </p>
<p>It’s hard to envision a congressional majority going along with making the Bush cuts permanent. I’m not sure it’s widely recognized, but it would take a major, very expensive bill (something like $1 trillion over 10 years) to make this happen, i.e., it would have to be legislated as a new round of big tax cuts. But with the war coming in at $170 billion last year, the stimulus with a price tag of around $150 billion, health-care deficits looming over the horizon, and some highly visible Democratic presidential candidates that are solidly against making the cuts permanent, we may have finally reached Bush-tax-cut fatigue. </p>
<p>The other reason this is important is that the Republican front-runners are all (excepting Huckabee, who may be fading) running on Bushonomics, and making the tax cuts permanent is their centerpieces (McCain adds rhetoric about spending cuts, but he’s vague and not too convincing). In recent weeks, with the threat of recession, they’ve been talking a bit less about it, and even, depending on the crowd, sounding a populist theme or two, but they haven’t altered their core platforms. They’ve hitched their economic wagons to Bush’s, and that will likely prove to be a big political mistake. </p>
<p>As I listened to the president call for permanent tax cuts, it felt like a tired ritual, a feckless plea for one more chance to give the goodies up to his people before he leaves the stage. I know the president and his team will be around for a while longer, but amid the stultifying air of this ritual, the repetition of this and other tired mantras, I felt something new and exciting: the sense that the Bush era is winding down. There’s a flicker of light at the end of the tunnel, and it’s truly radiant. </p>
</div></div></div>Tue, 29 Jan 2008 19:17:54 +0000146969 at http://prospect.orgJared BernsteinWhich Kind of Economics?http://prospect.org/article/which-kind-economics
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <blockquote><p><b><a href="http://americanprospect.bookswelike.net/isbn/0691129428">The Myth of the Rational Voter: Why Democracies Choose Bad Policies</a></b> by Bryan Caplan <i>(Princeton University Press, 276 pages, $29.95)</i></p>
<p><b><a href="http://americanprospect.bookswelike.net/isbn/0871542838">America Works: Critical Thoughts on the Exceptional U.S. Labor Market</a></b> by Richard B. Freeman <i>(Russell Sage Foundation, 191 pages, $19.95)</i></p>
</blockquote>
<p>Economic analysis can con-strict our imagination and choices, or it can allow us to evaluate choices with greater clarity and insight and help us to achieve the goals of a prosperous and decent society. The two books under review here show contemporary economics in its most dismal and luminous forms. Both argue that public policy is seriously off track, but the similarity ends there. One writer assumes that economists always know best, and he provides a misleading and constricted view of America's economic alternatives. The other has a deep respect for market forces as well as an appreciation of their limits, and he provides a far more useful guide to some of the critical economic choices that the country faces today. </p>
<p>In <i>The Myth of the Rational Voter</i>, Bryan Caplan claims that because voters don't understand his version of conservative economics, they are unable to evaluate economic policy alternatives correctly. In fact, according to Caplan, who is an economics professor at George Mason University, non-economists consistently support policies that they think will help them but will actually make them worse off. In other words, we would be better off if everyone without an economics degree stayed home on Election Day. </p>
<p>The big problem with Caplan's argument is that he fails to show that his version of economics gives us the optimal policies. For example, conventional neoclassical economics predicts that raising the minimum wage will lead to job losses for some of those affected by the increase. Research on recent increases in the minimum wage, however, reveals that their employment effects hover around zero. Some research finds slight job losses, much finds no effect, and a few studies find a positive impact on jobs. Is it possible that the majority of voters who support moderate increases in the minimum wage know this literature better than Caplan? </p>
<p>Or take another example: For years, economists of Caplan's stripes believed that if the unemployment rate fell below 6 percent, inflation would spiral. Yet unemployment fell in the 1990s, hitting 4 percent in 2000, and inflation decelerated. It turns out that the allegedly irrational voter who ignored most professional economists was right. </p>
<p>Of course, voters aren't steeped in economic research nor are they necessarily rational about economic policies. When they have a direct stake, people sometimes have far more nuanced views than Caplan would allow. Regarding trade, for example, Caplan believes that voters suffer from what he calls an "antiforeign bias." He imagines the typical non-economist saying about this issue: "Foreigners? Could it really be mutually beneficial for us to trade with <i>them</i>?" Yet, a <i>New York Times</i>/CBS poll from earlier this year showed that although two-thirds of respondents believe trade is good for the U.S. economy, a slight majority (51 percent) believe we've lost more than we've gained from globalization. People are beginning to understand, better than some economists, that while expanded trade has boosted growth, the benefits haven't reached them, and this understanding is leading them to support politicians such as Sens. Sherrod Brown and Jim Webb who speak to this inequality. That's not irrational. </p>
<p>In the absence of evidence that Caplan's economics can reliably point us toward superior outcomes, the structure of his argument crumbles. Economists, he concedes toward the end, "are often accused of arrogance," and to help prove this point, he has given us a book that is a prime example of why that description so often seems apt. </p>
<p>Richard Freeman's <i>America Works</i> is an altogether different kind of book. Freeman, a Harvard labor economist with a long career of careful, empirical research and a deep historical knowledge of American political economy, provides us with one of the most convincing and authoritative accounts of the strengths and weaknesses of the U.S. economy. This is a slim, readable volume that both celebrates market forces and provides a stark warning of the need to strengthen the institutions that hold those forces in check. </p>
<p>At the heart of <i>America Works</i> is a detailed, thoroughly documented critique of changes in the labor market and political economy over the past few decades. America is not working the way that Freeman thinks it should, can, or has in the past, and he's not happy about it. The analysis starts with the recognition that the U.S. economy is an exception from patterns prevailing elsewhere: "More than any other advanced country, the United States relies on the competitive labor market to determine the well-being of workers and the living standards of their families." In comparative perspective, our markets have become increasingly unfettered by collective bargaining, national health insurance, safety nets such as unemployment insurance, mandated vacation time, worker training, or virtually any dimension of what is broadly called the "social contract." </p>
<p>In other words, relative to every other advanced economy, we let markets rip. The problem is that during the past few decades, they've been ripping up the social fabric. The result is much higher levels of inequality, and Freeman, a master of international comparisons, provides tons of compelling and readable evidence. </p>
<p>This is not an original point, but given Freeman's depth of understanding of both sides of this equation—markets and their buffers—he develops his theme with exceptional clarity and effectiveness. In chapters on diminished unions, weak social insurance and porous safety nets, the rising clout of executives relative to the rest of us, and globalization, Freeman paints a clear picture of how, under the rubric of deregulation and expanded trade, economic power has shifted from labor to capital. </p>
<p>These developments jammed the mechanisms that in earlier decades ensured a much more equitable distribution of the fruits of productivity growth. The result is that since the latter 1970s, wages, income, and wealth have been accumulating at the top of the scale, leading to levels of inequality we haven't seen in this country since the Roaring Twenties. Moreover, inequalities of this magnitude are self-reinforcing: They purchase a politics that exacerbates them (see Bush tax cuts), and block pathways to opportunities for the have-nots. </p>
<p>In a mode that is too rare among academic economists, Freeman worries that such distributional dynamics are "unhealthy for American ideals of political classlessness and shared citizenship. The term ‘two Americas' … is more than political rhetoric. It is reality." </p>
<p>Moreover, according to Freeman, things don't have to be this way. Many writers on economics see an inexorable trade-off between growth and inequality; in the words of influential <i>Washington Post</i> columnist Steven Pearlstein, "There is no realistic high-growth, low-inequality solution." </p>
<p>Freeman flatly rejects this notion. He recognizes that some of his "conservative colleagues believe that Americans have no choice but to ‘suck it up' and accept growing inequality and insecurity at work, though they would never use such strong language … I reject these prescriptions for doing nothing." </p>
<p>His program for restoring balance comprises the last chapter of <i>America Works</i>. It's a terse discussion, and while some may find the ideas to be too bare-bones, Freeman hits precisely the right level of detail for this kind of book. He offers two sets of proposals, the first targeted at workers and firms, the second at worker bargaining power. The first set includes boosting the pay of low-wage workers through higher minimum wages and an expanded Earned Income Tax Credit (those arguing against minimum wages always set these two ideas up as oppositional, but Freeman is right that we need both), national health care (among other advantages, it would "lower the marginal cost of hiring labor"), greater public investments, and more profit sharing. </p>
<p>The second set includes greater corporate governance as an antidote to irresponsible boards run by old-boy networks, and expanding "modes of representation for workers beyond the dichotomy between a collective bargaining contract and nothing." In earlier work that's now widely accepted, Freeman almost single-handedly reversed economists' negative assessment of unions' impact by showing that organized labor pushes back against inequality without hurting productivity growth. </p>
<p>Now, however, Freeman advocates "open-source unionism," a pretty different creature from the current form. For one, it requires neither majority status nor collective-bargaining contracts; in fact, such organizations lack the ability to represent workers in a particular office or factory and cannot bargain with management over wages and benefits. Instead, think of these groups as membership organizations, like the AARP, that represent the cause of labor writ large. (The AFL-CIO has already created one such organization, Working America, which now has more than a million and a half members.) If open-source unions developed successfully, they could give voice to the majority of workers, who, according to Freeman's survey data, want to be represented by a union but don't belong to one now. </p>
<p>Of course, open-source unions might not succeed, and one can certainly worry about the effectiveness of unionism that doesn't involve collective bargaining. From the perspective of a political movement representing labor's concerns (didn't there used to be a party that did that?), I like the idea of open-source unionism. But Freeman himself would probably grant that relative to the direct bargaining of traditional unions, it is only an indirect way to reconnect growth and living standards. </p>
<p>What Freeman ultimately shows is that, yes, "America works," but it could work much better. For a while now, it's worked in a manner that's fundamentally inconsistent with the other side of American exceptionalism—the part about opportunities for all and fair rewards for true merit and for anyone willing to make a gainful effort. This invaluable book points the way back to that truly exceptional America.</p>
</div></div></div>Fri, 10 Aug 2007 22:59:34 +0000146528 at http://prospect.orgJared BernsteinIs Education the Cure for Poverty?http://prospect.org/article/education-cure-poverty
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>Economists may disagree a lot on policy, but we all agree on the "education premium" -- the earnings boost associated with more education. But what role can education play in a realistic antipoverty policy agenda? And what are the limits of that role? </p>
<p>First, it depends on whether you're talking about children or adults, and schooling versus job training. And second, the extent to which education is rewarded depends on what else is going on in the economy. </p>
<p>As Greg J. Duncan's companion piece (page A20) suggests, investment in early childhood has immense benefits. And at the other end of the schooling spectrum, college graduates' wage advantage over those with only a high-school diploma went up dramatically in the 1980s and early '90s. But the premium that high-school graduates enjoy over dropouts has been flat for decades. In 1973, high-school grads earned about 15.7 percent more per hour than dropouts, 15.9 percent in 1989, 16.1 percent in 2000, and 15.5 percent last year. And for adult workers, the historical record for job-training programs is pretty dismal, though more recent initiatives -- with their focus on more carefully targeting training for local labor markets -- show much more promise. </p>
<p>Nobody doubts that a better-educated workforce is more likely to enjoy higher earnings. But education by itself is a necessary insufficient antipoverty tool. Yes, poor people absolutely need more education and skill training, but they also need an economic context wherein they can realize the economic returns from their improved human capital. Over the past few decades, the set of institutions and norms that historically maintained the link between skills and incomes have been diminished, particularly for non-college-educated workers. Restoring their strength and status is essential if we want the poor to reap the benefits they deserve from educational advancement. </p>
<p><b>What Research Shows</b> </p>
<p>Julie Strawn of the Center for Law and Social Policy, reviewing an extensive sample of basic education and training programs, concluded that education alone is much less successful in raising employment and earnings prospects than education combined with a strategy of focused job training (with an eye on local demand), "soft skills," and holding out for quality jobs. </p>
<p>One study found that a year of schooling raised the earnings of welfare recipients by 7 percent, the conventional labor economics finding. But given that many of these workers entered the job market in the $6- to $8-an-hour range back in the 1990s, you're talking about moving families closer to the poverty line, not pushing them significantly above it. </p>
<p>Strawn reports that when education is combined with multidimensional job training, readiness, and a quality job search, the returns more than double. One Portland, Oregon, program resulted in a 25 percent increase in earnings, a 21 percent increase in employment, and a 22 percent reduction of time spent on welfare (all compared with a control group that didn't get the services). </p>
<p>This finding makes intuitive sense: Programs that combine general education with training specific to both the individual and his or her local labor market work better than ones that fail to combine these activities. (They're also more expensive, but you get what you pay for.) Yet to get to the nub of the strengths and limits of education and poverty reduction, we need to go back to first principles and think about how they interact with the realities of the political economy. </p>
<p>Education is only a partial cure for poverty because of all the other recent changes in the labor market. At least half of the inequality increase has taken place within groups of comparably educated people, and since 2000 that proportion has been increasing. Income-inequality data show that the concentration of income in 2005 is the highest it has been since 1929. Yet research that Lawrence Mishel and I conducted shows that since the late 1990s, the college wage premium has been flat. In real terms, college wages were up less than 2 percent from 2000 to 2006. Even among the highly educated, only some are getting ahead, and lots aren't. </p>
<p>In short, we are not living in a meritocracy, where we can reliably count on people being fairly rewarded for their improved skills. So we need additional mechanisms in place to nudge the invisible hand toward outcomes that are more meritocratic and just. </p>
<p><b>SKILL DEMANDS FOR THE WORKING POOR</b> </p>
<p>Education is a supply-side policy; it improves the quality of workers, not the quality or the quantity of jobs. A danger of overreliance on education in the poverty debate is that skilled workers end up all dressed up with nowhere nice to go. </p>
<p>Some economists contend that faster rates of technological advance require ever more highly skilled workers, and that demand shifts lead to low wages for the low skilled. But our work at the Economic Policy Institute suggests that while technological changes have always been an important factor in the labor market, the rate of change now is no greater than in the recent past. Technological change is one of the reasons we've doubled the share of college grads but continued to see their unemployment rates in the 2 percent range -- we produce and absorb a lot of college grads. </p>
<p>Our economy, however, is still very much structured to produce lots of low-wage jobs. In fact, according to the occupational projections by the Bureau of Labor Statistics, the low-wage sector of our economy will be the source of much job growth over the next decade. The American economy will continue to employ significant numbers of retail salespersons, waiters and waitresses, food-prep workers, home health aides, maids and housekeepers, etc. Of the 30 occupations adding the most jobs to our economy, those requiring the least training make up half of the total. </p>
<p>The question, thus, is not whether jobs for those with only high-school degrees or even some college will exist or be plentiful in our future (they almost certainly will be); the question is whether the quality of these jobs will help reduce or reinforce working poverty. </p>
<p>In our most recent version of "The State of Working America," we borrow a technique from economists Sheldon Danziger and Peter Gottschalk for analyzing the roles played by multiple determinants of poverty. Their method parses out the roles of race, family structure, economic growth, and inequality, and we add the role of education. </p>
<p>As the chart on the right shows, family poverty rates did not fall much between 1969 and 2000, because major factors were offsetting one another. Improved education lowered family poverty by almost 4 percentage points, a considerable effect. But economic growth and inequality had considerably larger effects. Growth in the overall economy lowered poverty rates by 5.7 points, while inequality raised it by 5.1 points. Family structure added 3 points to family poverty rates over these years, and race added 1 point. </p>
<p>Decompositions of this type are far from definitive; they tend to hold one factor constant and see how things change, then do the same for another factor, etc. But in this case, the results are demonstrative of the main point regarding education in the poverty debate: It's an important part of the story, but it's not the whole story, or even the most important part. </p>
<p></p><center> <img border="1" alt="" src="http://www.prospect.org/web/galleries/default-image/bernstein_chart_1.gif" /></center>
<p><b>EDUCATION PLUS</b> </p>
<p>Demand -- the extent of overall growth, how taut the labor market is -- matters, as does the extent and nature of inequality, as does the quality of jobs. In the late 1990s, poverty fell to historic lows for those with the lowest education levels, including African Americans and single mothers. Did skills rain from the heavens? Did employers suddenly shed their advanced-skill requirements? Of course not. It was good old-fashioned full employment forcing employers to bid wages up to get -- and keep -- the workers they needed. And yes, this interacted with welfare reform and a significant expansion of work supports, like the Earned Income Tax Credit, subsidized health and child care, and the minimum-wage increase. </p>
<p>In fact, one could be forgiven for thinking that, except for some of the punitive aspects of welfare reform, we briefly got poverty reduction right during the late 1990s. The one-two punch of full employment and expanded work supports worked to meet the expanding labor supply with even faster growing labor demand, and the subsidies helped to close part of the gap between what people earned and what they needed. </p>
<p>But notice how all of this is unwinding in the 2000s. Unemployment is low, but other indicators -- such as labor-force participation and real wage trends -- suggest we're not yet at full employment; there's been no expansion of work supports, and even some retrenchment of supports such as the State Children's Health Insurance Program and child care, policies clearly associated with helping the working poor get ahead. The outcome has been predictable and depressing, especially in contrast to the progress we made in the 1990s. </p>
<p>And if education is one key antipoverty strategy, then programs demanding that beneficiaries "work first" often sacrifice the promise of increased returns to education and training on the altar of take-any-job. This approach is not only stingy; it's also shortsighted, as it threatens to diminish the likelihood that those who want to "play by the rules" will realize their economic potential. </p>
<p>Helping the poor receive more education is part of the answer. Whatever their skill level, workers need a context wherein they can be rewarded for their skills, where the benefits of the growth they help to create flow freely their way. This means having a set of protections, institutions, regulations, and social norms in place to keep the greedy fingers of inequality from picking the pockets of the working poor.</p>
</div></div></div>Sun, 22 Apr 2007 20:52:37 +0000146223 at http://prospect.orgJared BernsteinShort Circuitedhttp://prospect.org/article/short-circuited
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>---</p>
<p><strong>Date:</strong> April 10, 2057</p>
<p><strong>Memo:</strong> From the communitarian of labor</p>
<p><strong>Topic:</strong> Historical musings regarding the dark ages</p>
<p>---</p>
<p>The seed of the destruction of the market economy that predominated until the early 21st century was planted in a 50-year-old <a href="http://newsroom.circuitcity.com/releasedetail.cfm?ReleaseID=235835">press release</a> from the electronics retailer Circuit City. </p>
<p>As was common in this dark period of our economic history, the firm announced a restructuring, claiming that the proposed changes would position them to make "improved and sustainable returns in today's marketplace." Part of the plan was to lay off 3,400 sales workers -- again, not unusual, as restructurings often involved "layoffs." (Younger persons will not recognize the word -- it was a practice wherein people were told they no longer had a job).</p>
<p>What was so unusual about this announcement, however, was Circuit City's claim that they were going to replace the laid off workers with lower wage workers (yes, back then employers simply decided what they would pay their workers).</p>
<p>Given the times, their rationale for making big changes made sense. Their "stock price" (don't ask -- it was a complicated form of legalized gambling) was off by a third. But, despite their claims to the contrary, their workers already made the pretty low market wage of about $11.50 and hour, and it was clear at the time their tactic was a recipe for lousier service, fewer sales, and lower profits. After an initial bump, their stock prices sunk further, and they soon were out of business.</p>
<p>What's amazing here, and so revealing about the ultimate demise of the market economy, is that the firm though it was a good idea to advertise this practice. They were a retailer, with stores in people's neighborhoods, not some behind-the-scenes player. Did they really think this was the message consumers wanted to hear? Did they really believe people would shop at a place where their fellow citizens were treated this way? </p>
<p>From our secure vantage point of today, we view this as a good example of the economic corruption of the earlier regime. What Circuit City did was not illegal, but it was immoral. Traditional economists at the time believed that the invisible hand -- the underlying forces of the free market system -- guided society to the most efficient outcomes, which also tended to be the most just outcomes. We now recognize that when firms can act in this manner, that pristine result is unachievable. </p>
<p>It was a small case, but it contained the seed of the destruction of all that was good and productive about the old market economy. </p>
<p>It helps us see clearly how the capitalists killed capitalism. Somehow they failed to recognize that the concentration of income -- in 2005 the top one percent of households controlled 22 percent of all income, the highest since 1929 -- was politically unsustainable. The unabashed free-trade advocates, by denying any downsides to globalization, sowed the seeds of protectionist measures that divided nations and killed the benefits of trade. The rabid opponents of social insurance, safety nets, minimum wages, and unions made it impossible for workers to claim their fair share of growth and gave rise to a level of economic insecurity <em>amid</em> growth that sealed those opponents' own dismal fate.</p>
<p>Now, through our MRS (massive redistributive system), the top one percent controls one percent of national income. We all have jobs for life and our supreme leadership labor council decides what everybody gets paid. Perhaps we should thank our greedy forbearers.</p>
<p>Coffee break's over. Everybody back to work … NOW! </p>
<p><em>Jared Bernstein is a senior economist at the Economic Policy Institute and author of the new book</em> <a href="http://americanprospect.bookswelike.net/isbn/1576753875">All Together Now: Common Sense for a Fair Economy</a>.</p>
<p></p><center>* * *</center>
<p>If you enjoyed this article, subscribe to <em>The American Prospect</em> <a href="http://www.prospect.org/subscribe">here</a>.</p>
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</div></div></div>Wed, 04 Apr 2007 16:01:32 +0000146166 at http://prospect.orgJared BernsteinKeep it Cleanhttp://prospect.org/article/keep-it-clean
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>It should come as no surprise that one of the first acts of the 110th Congress will be legislation to raise the minimum wage. A bit more surprising is the endorsement by President Bush, who recently announced that a minimum wage increase was a policy on which he and the incoming Democratic congress could "work together."</p>
<p>Unfortunately, his cooperation comes at a cost. To the president, "working together" on a bill to increase the $5.15 federal minimum wage to $7.25 over two years means … guess what? … more tax cuts.</p>
<p>There's every reason to keep this minimum wage bill clean and little rationale for tax cuts. </p>
<p>Bush's stated motivation for accompanying cuts is to avoid "punishing" small businesses, by offsetting the increase in their labor costs with "targeted tax and regulatory relief." Since all low-wage firms face the same increase (and thus no one firm is at a competitive disadvantage) and Congress has surpassed the nine-year Reagan-era record for failing to raise the minimum wage, "punish" seems like an awfully strong word. Nevertheless, recent history suggests that any such offset will cost much more than the wage increase and will not be effectively targeted at low-wage employers. Moreover, the tax cuts would be permanent, even though the value of the minimum wage hike is eventually eroded by inflation.</p>
<p>The increase to $7.25 by 2009 is a historically small one. Research by Liana Fox of the Economic Policy Institute suggests that it will directly lift the wages of about four percent of the workforce, compared to more than twice that share for the last federal increase in 1996-97. </p>
<p>Speaking of the last increase -- from $4.25 to $5.15 -- it passed with some tax cuts served up by the Gingrich Congress that Clinton had to swallow. More on these in a moment, but legislators and the public should recognize that this pairing of tax cuts and minimum wage increases is not the norm: neither the 1990 increase under Bush I nor any others were passed with tax cuts. Raising the minimum wage is a very simple piece of work; most bills are literally a few paragraphs long. And the increase has virtually no budgetary impact.</p>
<p>Tax cuts, on the other hand, are costly, and history shows they are not likely to be well-targeted. In 1996, there were tax cuts for small business equipment investments and pension plans, but there were also tax credits for R&amp;D at big corporations and for adopting parents, and a new IRA for homemakers. </p>
<p>In 2000, the GOP leadership added these bright ideas to a proposed minimum wage increase: a reduction in the estate tax, increased write-offs for business meals and for business investments, tax breaks for timber companies and for tax-exempt bonds, a higher self-employment health deduction, and expanded enterprise zones. Whatever their merits, neither the legislated tax cuts in 1996 nor the proposed tax cuts in 2000 were "targeted offsets" for businesses paying the minimum wage.</p>
<p>What's more, such tax cuts are usually forever, while federal minimum wage increases die a slow death. Since the federal minimum is not indexed to inflation, its value erodes over time -- the real value of the current minimum is at a 50-year low. Five to ten years after the increase, almost all of its benefits will have eroded, yet the tax cuts will be yielding dividends for as long as they stand (those from 1996 are still in place, for instance). Our analysis of the GOP proposal in 2000 found that the value of the proposed tax cuts surpassed that of the wage increase by 11 to 1 ($123 billion vs. $11.2 billion over ten years).</p>
<p>And by the way, if raising the minimum wage has to be offset by small business tax cuts, shouldn't its real decline be offset by tax increases? Democrats in the new Congress will insist that any new tax cuts be paid for. Where's the revenue coming from?</p>
<p>No matter. Neither symmetry nor fiscal prudence are in play here. And we suppose you could write this off as the predictable horse-trading we're likely to see over the next few years. No one should be fooled, however, that a new bundle of tax cuts is either warranted or related to the much-needed minimum wage increase. So, Mr. President, let's keep it clean.</p>
<p><em>Jared Bernstein is a senior economist at the Economic Policy Institute. Lawrence Mishel is EPI's president.</em></p>
<p></p><center>* * *</center>
<p>If you enjoyed this article, subscribe to <em>The American Prospect</em> <a href="http://www.prospect.org/subscribe">here</a>.</p>
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</div></div></div>Thu, 04 Jan 2007 00:07:06 +0000145943 at http://prospect.orgJared BernsteinCaging the Inflation Hawkshttp://prospect.org/article/caging-inflation-hawks
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>As was widely expected, the high priests at the Temple of the Fed announced yesterday that they would hold the Fed Funds Rate (FFR) steady at 5.25 percent. </p>
<p>There are inflation hawks out there who will criticize the decision, but it's a good thing these hawks are keeping their claws off the pause. Neither the economy nor workers' wages need higher interest rates and slower growth right now.</p>
<p>Technically, the FFR is the interest rate the Fed charges to lend money to banks, but practically, it is the main lever by which they set the cost of borrowing throughout the economy. It's also a deeply scrutinized signal of where the Fed thinks the economy is, or should be, going. When they raise the rate, they're signaling their concern that the economy is overheating, and needs the weight of higher borrowing costs to slow it down. And visa versa -- lower rates are intended to boost economic activity.</p>
<p>By continuing to pause -- the FFR has been at 5.25 since June 29th -- the Fed is diagnosing the overall economy as "not too hot, not too cold," a kind of Goldilocks scenario. While Fed chairman Ben Bernanke, along with others on the interest rate committee, have expressed concern about inflationary pressures, their statement yesterday suggests that these threats are abating and inflation is heading toward their comfort zone.</p>
<p>Ben and co. made the right move (or lack thereof). Here are a few reasons why:</p>
<p>First, the overall economy is clearly slowing, with real GDP growth well below its potential (most economists place the economy's potential between 3 and 3.5 percent real GDP growth). Thanks to the housing slump and its attendant downsides (less activity in related industries and diminished housing wealth), real GDP increased at an annual rate of 2.2 percent in the third quarter. Forecasts for the current quarter are also below trend -- the Blue Chip forecasters (an average of many independent forecasts) expect 1.9 percent. Beyond that, the debate regarding growth next year boils down to whether the economy will experience a soft landing (continued below-trend growth) or a hard landing (a recession). In other words, the economic bicycle is already pedaling uphill; the last thing it needs right now is an even steeper slope induced by a Fed rate hike.</p>
<p>A big question for the Fed is whether this slowdown is reflected in slower inflation. The answer: yes. If you look at three month, annualized changes in the core consumer price index (the Fed prefers this measure, which excludes volatile energy prices), you find the following pattern:</p>
<p><strong>Annualized 3-month changes, core CPI (source: BLS)</strong></p>
<p></p><table width="155" border="1" cellspacing="5" cellpadding="5"><tr><td>May-06</td>
<td>3.8%</td>
</tr><tr><td>June-06</td>
<td>3.6%</td>
</tr><tr><td>July-06</td>
<td>3.2%</td>
</tr><tr><td>August-06</td>
<td>3.0%</td>
</tr><tr><td>September-06</td>
<td>2.7%</td>
</tr><tr><td>October-06</td>
<td>2.3%</td>
</tr></table><p>For a Fed banker seeking decelerating core inflation, what's not to like?</p>
<p>Second, as Economic Policy Institute economist Josh Bivens and I recently <a href="http://www.epi.org/content.cfm/webfeatures_snapshots_20061129">reported</a>, lower inflation in recent months means that the <em>real</em> FFR has actually been rising, and it's the real rate that drives investment decisions. With the rate of inflation falling, the Fed actually needs to lower the FFR to keep the real rate from rising.</p>
<p>Third, and this one's closest to my heart -- and I suspect to yours too. After five years of a recovery uniquely rich in productivity growth and poor in real wage growth, low- and middle-wage workers are just starting to see some serious real gains. (It's true that thanks to the tight job market, nominal wages had been rising for a while, but energy-driven price growth swallowed up those gains and more until very recently.) On a yearly basis, the real wages of blue-collar factory workers and non-managers in services were up 2.4 percent in September and 2.8 percent in October; chances are November will show similar gains. Before that, this real wage series was down 1.8 percent off its peak in late 2003.</p>
<p>Only the most Scrooge-like Fed would shut down the party just when the working class got there. But of course, gains like these are exactly what make Fed-heads nervous. Bernanke himself recently warned that now that energy prices have moderated, his main inflationary concern is labor costs.</p>
<p>But the fact is that these real gains came wholly from slower price growth, not faster wage growth, so they're not threatening wage-push inflation. Nominal hourly wages have expanded at a year-over-year rate between 3.8 percent and 4.1 percent since the summer. And if you look at the same type of annualized three-month changes that we did above with prices, you see that hourly wage growth has decelerated in recent months, from 4.7 percent in August to 3.1 percent last month. </p>
<p>And let us not overlook the fact that firms' profit margins remain historically very high, meaning businesses could afford non-inflationary wage gains yet maintain solid, as opposed to excess, profitability.</p>
<p>All of these factors were well known to those at the Fed, and probably played a role in their decision to hold. (Big Ben himself, bless his class-warrior soul, has commented on the profitability point.) In fact, assuming these trends hold up, would it kill anybody over there to lower rates at the next meeting?</p>
<p>Stay tuned.</p>
<p><em>Jared Bernstein is a senior economist at the Economic Policy Institute and author of the new book</em> All Together Now: Common Sense for a Fair Economy.</p>
<p></p><center>* * *</center>
<p>If you enjoyed this article, subscribe to <em>The American Prospect</em> <a href="http://www.prospect.org/subscribe">here</a>.</p>
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</div></div></div>Wed, 13 Dec 2006 15:39:01 +0000145895 at http://prospect.orgJared BernsteinHoney, I Raised the Fed Rate Againhttp://prospect.org/article/honey-i-raised-fed-rate-again
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>
For the 16th time in a row, the Federal Reserve has raised its benchmark interest rate, bringing the federal funds rate to 5 percent.</p>
<p>The rate hike was widely expected. The question among soothsayers who parse the entrails of the Fed's statements was not whether this hike would occur, but whether the committee would signal an end to the long climb that began back in June of 2004 when the rate was 1 percent. </p>
<p>When the Fed funds rate was at a 40-year low and the economy was beginning an expansion, rate hikes were as close to no-brainers as such things get. Now, Federal Reserve Chairman Ben Bernanke and the rest of the Open Market Committee are deep into a 3-D chess game, with many crosswinds blowing in all directions. </p>
<p>The language in last week's announcement suggests that Bernanke and Co. will be doing some serious data mining to determine their next move.</p>
<p>First and foremost, they'll be evaluating conditions in the macro-economy, specifically growth and inflation. GDP grew smartly in the first quarter of the year—up 4.8 percent—but is widely expected to slow in coming quarters. There are important forces pushing back against faster growth right now, including higher energy costs, a cooling housing sector, heavily indebted households, and, of course, the Fed's own higher interest rates. One influential consensus (the Blue Chip) forecasts the economy expanding at a 3.1 percent rate for the rest of the year.</p>
<p>From the Fed's perspective, this says hold 'em (i.e., don't raise any further). Prior rate hikes are already taking hold, and there's a danger of hitting the brakes too hard. Last month's disappointing job gains of 138,000 was hopefully a hiccup, but if it persists, the last thing we need is higher rates pushing against labor demand.</p>
<p>Inflation hawks, on the other hand, are spooked by some recent sightings of wage gains (it's about time!), and fear higher labor costs will pass through to prices. But the recent Fed statement noted that “ongoing productivity gains” have helped keep wage-push inflation in check. This is an important point, because as noted in our <a href="http://www.epi.org/content.cfm/webfeatures_econindicators_jobspict_20060505" target="outlink">recent analysis</a> real wages are just now back to where they were in November 2001, the start of the current recovery. The last thing you want the Fed to do is to kill the party just when the working class gets there. </p>
<p>And by the way, let's not forget the three P's—the three mechanisms through which higher labor costs get absorbed: prices, productivity, and my personal favorite right now, <b>profits</b>. Given their historically <a href="http://www.epi.org/content.cfm/webfeatures_snapshots_20060330" target="outlink">fat profit margins</a>, many firms could pay for wage gains out of profits and still be doing fine, thanks.</p>
<p>So here again, absent sharp acceleration in compensation growth or a reversal of productivity growth, the Fed can take a pause.</p>
<p>What about energy-price inflation? That, not wage growth, is what has driven prices up in recent months. Well, that's a tough itch for the Fed to scratch. Slowing the economy with higher interest rates to counteract higher energy prices doesn't make a whole lot of sense right now.</p>
<p>Finally, there's an interesting, potential new trend worth considering. For most of the last two years, long-term interest rates have been uncharacteristically unresponsive to Fed rate hikes—despite the Fed's relentless hikes, long-term rates didn't go up much at all. Now that the Fed is signaling they're at least considering leveling off, long-term rates have started rising, partly in response to improvements in other parts of the global economy (Ed Andrews has an <a href="http://www.nytimes.com/2006/05/09/business/09fed.html?_r=1&amp;oref=slogin" target="outlink">interesting discussion</a> of this in <i>The New York Times</i>. </p>
<p>It's too soon to tell, but it does raise the possibility that the Fed's most potent lever in terms of ratcheting domestic growth rates up and down—monetary policy—is less potent in a truly global economy. If so, it's not only blue- and white-collar workers whose clout has been diminished. Add central bankers to the list.</p>
<p><i>Jared Bernstein is a senior economist at the Economic Policy Institute and author of the new book, All Together Now: Common Sense for a Fair Economy.</i></p>
</div></div></div>Mon, 15 May 2006 16:38:10 +0000145427 at http://prospect.orgJared BernsteinShort Changedhttp://prospect.org/article/short-changed
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>
When the economy is doing well, presidents tend to spout growth rates and historical comparisons in their State of the Union speeches, while leaders of the other party suffer through the speech. If a president is presiding over a downturn, he feels their (and everybody's) pain, tortures a few numbers to suggest things are not that bad, and describes a way forward.</p>
<p>But -- despite the serious economic challenges the country faces -- we heard little about it last night. The economy and economic policy got short shrift, with one or two statistics (4.6 million jobs and four-plus years of uninterrupted growth), a few sentences on health care, a few lines on tax cuts, and a smattering of education. Sometimes what presidents don't say speaks volumes. It's worth pondering why the economics section of the speech was light.</p>
<p>First, many things are not going Bush's way right now. A few days ago, we learned the real GDP rose 1.1 percent in the last quarter of 2005, the worst growth rate in three years. Before that, the Bush team could brag of at least moderate growth rates, but their Achilles' heel was that the growth wasn't trickling down -- it was gushing up.</p>
<p>In fact, the morning of the speech, we at the Economic Policy Institute released a note showing that, according to Bureau of Labor Statistics data, one of the broadest measures of wage growth in the economy fell about <a href="http://www.epinet.org/content.cfm/webfeat_econindicators_wages_20060131" target="outlink">1 percent</a> in real terms last year. The administration's rap had been, “Pay no attention to the wage squeeze. With rising health costs, employers are just taking dollars from the wage side and plowing them into health benefits.” Except real compensation was essentially unchanged (down 0.2 percent) in 2005. And this was yet another year with strong productivity growth.</p>
<p>The fact is that profits, which soared over the last few years, are squeezing both wages and compensation. The president is right about the economy growing for four years. But the distribution of that growth has been highly skewed. It's possible the administration truncated the usual “ain't we great” rap here because of the dissonance it might cause with so many Americans working harder yet still falling behind.</p>
<p>Oh, and that 4.6 million jobs. It sounds like a big number, but that's half the rate at which jobs were growing at this point in the last recovery. The rate of job growth over the period to which the president referred was 3.6 percent; the historical average for comparable periods in the past is 8.4 percent. In fact, that remaining slack in the job market is one reason real wages are doing so badly (faster energy-induced price growth is another).</p>
<p>It also seemed, to me at least, that another reason for the shabby treatment of domestic policy was that the president isn't that engaged in this stuff anymore. Sure, he'd like to cut more taxes, but, especially given the flop of his 60-city Social Security tour, the fire in his belly is all about 9-11, the Iraq war, domestic spying, and intimidating the wimps who refuse to see it his way on foreign policy. But enough psychoanalysis. Here is a look at some of the president's recommendations.</p>
<p><i>Don't Let the Sun Go Down</i>: The president touted his $880 billion in “tax relief” and tried to connect those dots to the ongoing economic recovery. To see the stretch in this argument, check out this analysis by my <a href="http://www.epinet.org/content.cfm/bp168" target="outlink"> EPI colleague Lee Price</a>, but it's a typical State of the Union move to make such connections.</p>
<p>There were, however, two pretty egregious parts that followed. First, there was this crazy argument that if we stick to the law and let the tax cuts sunset (they're set to expire over the next few years), “American families will face a massive tax increase they do not expect.”</p>
<p>Do not expect? The cuts were sold on the basis that they'd expire by the end of this decade. That's the only way the president and Congress could at least create the illusion that they could control the deficit that the cuts helped to create. Their expiration is on the books; that's hardly unexpected. We all understand that powerful forces would like to extend them, but there can be no doubt that making the tax cuts permanent involves new tax cuts, and there are many in Congress, including Republican moderates, who may not be so quick to sign off on these new cuts.</p>
<p>The other objectionable part here was the president's equating good stewardship with cuts in “non-security discretionary spending.” What's really being said here is that given these massive tax cuts, they've got to make a show of cutting spending. But they can't go after entitlements or defense, or any of those programs with big lobbyists behind them, which leaves Medicaid, food stamps, student aid, child support enforcement -- these are what our benighted fiscal stewards are going after, and they're actually making <a href="http://www.nytimes.com/2006/01/30/politics/30budget.html?_r=2&amp;oref=slogin" target="outlink">“progress.”</a> </p>
<p><i>Attention Health Care Shoppers</i>: The president was expected to say more here, but again, his heart wasn't in it. The administration will soon be offering expansions of Health Savings Accounts, their major health care initiative. These are personal accounts (sound familiar?) where you can save and withdraw money tax free for medical expenses. To join the program, you have to purchase an insurance policy with a high deductible. These policies cover the really expensive stuff, but for the rest of your care, you pay out-of-pocket.</p>
<p>The idea is that by shifting the costs for the small stuff from their insurers to their wallets, consumers will become better health-care shoppers. This is not the place for detailed analysis but many economists don't believe these plans will save money or lower health costs, and most people -- surprise -- are not interested in bearing more costs, even with the tax incentive.</p>
<p>Which isn't to say there's not a big problem in need of a solution here. To his credit, the president acknowledged last night that it isn't really Social Security that's going to gobble up the economy; it's health care. HSAs won't change that one whit, nor will it do much to address the plight of the 46 million uninsured Americans. </p>
<p>And by the way, the president did admit his team has no idea what to do about the health-care challenge, i.e., he announced a bipartisan commission to study the coming pressures on Medicare, Medicaid, and Social Security.</p>
<p>Speaking of admissions, the impressive part of the speech was the president's acknowledgement that “America is addicted to oil,” words that don't come easy to an old oil guy (I imagined a big sneer from Cheney when he heard that). But here again, as the <i>The New York Times</i> put it this morning, “… the goal was grand, the means were minuscule.” According to one analyst, the proposed new expenditures would just get renewable-energy funding back to its pre-Bush level.</p>
<p>After a nod to his guest-worker program, this part of the speech ended with some Clintonesque ideas about enhancing research and development and encouraging children to learn math and science. </p>
<p>But by then it was pretty clear that beyond cutting taxes, inveighing against “protectionists” (anyone who's concerned about the downsides of globalization), and incentivizing risk-taking as a health-care plan, the Bush administration's economic agenda has run out of gas. I suppose one could applaud that development but I find that too cynical. We face a set of economic challenges calling for true stewardship. We haven't had it for years, and we didn't get it last night.</p>
<p><i>Jared Bernstein is a senior economist at the Economic Policy Institute, a nonprofit, nonpartisan think tank in Washington, D.C. and author of the forthcoming book, All Together Now: Common Sense for a Fair Economy, published by Berrett-Koehler.</i> </p>
</div></div></div>Wed, 01 Feb 2006 22:19:53 +0000145195 at http://prospect.orgJared BernsteinNot Another Tax Cuthttp://prospect.org/article/not-another-tax-cut
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>The consensus was that they'd do it, and they did it. The Federal Reserve raised short-term interest rates again, the 11th consecutive rate increase, from a measly 1 percent in June of 2004 to 3.75 percent on September 20. </p>
<p>Technically, the rate in question is the interest rate that banks charge one another on overnight loans, but its impact is much more widely felt (see this <a href="http://www.washingtonpost.com/wp-srv/business/graphics/ratehike.htm">graphic</a> for how it works). In general, this rate-increasing campaign by the Fed represents an effort to be “less accommodative,” that is, to raise the cost of borrowing as the economy picks up speed. In Fed economists' own words, they're trying to “maintain price stability” by heading off any inflationary pressures that they fear may be building. </p>
<p>Given that this so-called removal of monetary stimulus has been going on for more than a year now, what's so interesting about the recent decision to proceed with business as usual? The answer is that this is the first Fed interest-rate move in the post-Hurricane Katrina world, and the way it interacts with misguided plans for future tax cuts is worth noting. </p>
<p>There were even a few analysts who thought the Fed might pause due to the economic disruptions caused by the hurricane. After all, the Congressional Budget Office estimates that the damage could cost 400,000 jobs and shave as much as a percentage point off economic growth over the rest of 2005. Other Katrina-related factors tilting against the increase were the recent big dip in consumer confidence and the probable decline in spending resulting from the hurricane and its joint impact on energy costs and family budgets.</p>
<p>But there were more factors leaning the other way. First, these central bankers are not in the business of surprising the markets, and without a lot more evidence, they didn't want to appear too worried. Recent comments from Fed members suggest that they're in reassurance mode, signaling that Katrina hasn't thrown the recovery off course (see statements to this effect in the <a href="http://www.federalreserve.gov/boarddocs/press/monetary/2005/20050920/">Fed's press release</a>). </p>
<p>Then there's the fiscal stimulus from the massive federally funded program to rebuild the affected areas. This amount is already at $62 billion and surely going higher -- the word on the street is that the bill could come to $200 billion. The members of the interest-rate committee might well be factoring this spending into their thinking. If the damage caused by the hurricane shaves a point off growth, this spending could easily put that point back (though spread over a longer period), so from the Fed's perspective, you're back where you started.</p>
<p>Extrapolating slightly, there's a lesson here regarding an upcoming policy fight -- at least I hope it's a fight -- in the halls of Congress.</p>
<p>One positive side effect of Katrina is that yet another round of tax cuts for the rich and spending cuts for the poor are temporarily on hold. Congress was all set to come back from its August recess and cut $70 billion in capital gains and dividend taxes, as well as $35 billion in spending from Medicaid, food stamps, child care, school training, and other such programs. </p>
<p>Katrina blew that agenda off the table. But once the images from the hurricane leave the front pages, it will be back. There are a million good reasons for no further tax cuts, but in the context of the Fed's action today, here's another one: We should be careful to avoid a situation in which fiscal and monetary policies are pulling in opposite directions.</p>
<p>Although it remains a highly unbalanced recovery, with growth flowing mostly to those at the top of the income scale (another reason not to pass more regressive tax cuts), the economy is expanding at a rate that the Fed's members clearly feel is just fine with them. Like I said, they're worried about overheating. It's possible that further tax cuts added to the Katrina spending could lead to a level of fiscal stimulus beyond the Fed's comfort level, . This in turn could lead them to accelerate their interest-rate-increasing campaign. </p>
<p>Many economists worry that the huge budget deficits that come out of this reckless pattern of revenue cutting will also lead to higher interest rates. And if our foreign creditors even think about pulling the plug on the billions they're lending us, interest rates will also have to shoot up to entice them to keep financing our international debt.</p>
<p>So here's the message for Congress and the administration: In the interest of interest rates, go ahead and spend what it takes to rebuild the Gulf Coast -- and stay the heck out of the tax-cut business.</p>
<p><i>Jared Bernstein is a senior economist at the Economic Policy Institute, a nonprofit, nonpartisan think tank in Washington, D.C.</i></p>
</div></div></div>Thu, 22 Sep 2005 11:50:15 +0000144875 at http://prospect.orgJared BernsteinSkills Setbackhttp://prospect.org/article/skills-setback
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>“The economists don't know what they're talking about.”</p>
<p>
Granted, this may seem like an odd opening for a piece by two economists, but the guy who said this -- a member of a focus group probing Americans' experiences in the current economy -- has a point.</p>
<p>
Policy-makers are waxing ever more enthusiastic about how great things are. In response to the most recent report on the gross domestic product, the research director at the Federal Reserve Bank of Minneapolis quipped, "It's kind of boring around here because the economy looks so good.”</p>
<p>
That all depends on who's doing the looking. Virtually every poll on the subject shows much more dissatisfaction with the economy than you'd guess either by looking at the “top-line statistics” (GDP, productivity, factory orders, and so on) or by listening to the cheerleading emanating from the White House.</p>
<p>
A recent <i>Wall Street Journal</i>/NBC News poll reported, for example, that public approval of President Bush's handling of the economy fell from 47 percent in January to 39 percent in July. A CBS News poll from the first week of August found that 52 percent disapproved of Bush's handling of the economy, while 42 percent approved. A <i>Washington Post</i>/ABC News poll showed that when the recession ended in November 2001, 13 percent said the state of the economy was poor. Last week, that was up to 21 percent.</p>
<p>
We've heard two major reactions to these results. The first is to keep swimming in that favorite river of the out-of-touch, de-Nile. These commentators argue that people actually feel fine about the economy, but their worries about the war are spilling over into other areas. </p>
<p>
But there's no evidence for this claim, and plenty of reasons to believe that respondents are truly reflecting their economic reality, like the fact that while productivity has soared, the inflation-adjusted wages of most workers are just about where they were when the recovery began.</p>
<p>
The other common response, like the one from Treasury Secretary John Snow, is to blame the victims -- the “less-educated people,” in his words -- whose lack of skills and smarts have blocked them from cashing in on an otherwise broad-based recovery. Opportunity abounds, according to this argument, if you've got the gumption and education to grasp the brass ring. Snow's undersecretary, Randal Quarles, amplified the point. "If the country as a whole is going to undergo economic growth,” he said, “then the population has to be able to take advantage of opportunities.”</p>
<p>
Sounds reasonable, given the constant drone by economists, policy-makers, and central bankers (e.g., Alan Greenspan) about the skills deficits of the U.S. workforce. But there are two fundamental problems with this view. </p>
<p>
First, it's not true. If it bothered to look at the actual trends in employment rates -- the share of a given population at work, and a proxy for that group's job opportunities -- the skills crowd would learn that since the last economic peak, March of 2001, they're up for one educational group (high-school dropouts) and down for everybody else, including college graduates.</p>
<p>
This doesn't mean we should all become dropouts. Obviously the more education you have, the better off you'll be. But even with its recent uptick, job creation has been persistently weak in industries that hire lots of college graduates, like information technology. The Congressional Budget Office also made this point in its recent analysis of the problem.</p>
<p>
Moreover, college-educated workers have not escaped the broad deterioration over the last few years in real wages. According to Bureau of Labor Statistics figures, college graduates' weekly earnings grew 0.9-percent less than inflation did in 2004.</p>
<p>
Second, when economists talk about people who are “less-educated” or “less-skilled,” they're not just talking about high-school dropouts; they're typically including others who have not completed college, a group that constitutes 71 percent of the workforce. It's a critical distinction, because it doesn't sound nearly so bad if a few “less-educated” workers are failing to get a boost. In fact, though, they're the majority. </p>
<p>
So if skill enhancement isn't the answer, what will it take to reconnect the economy to the people in it? To figure that one out, you'd have to look beyond the supposed shortcomings of the workforce and identify the forces channeling income growth upward. You'd have to look at offshoring, our trade deficit, declining union power, the value of the minimum wage, and the remaining shortage of jobs, particularly jobs with good wages and benefits.</p>
<p>
Or you could just shed a tear for the “less-educated people” and make the tax cuts for the wealthy permanent. Want to place a bet?</p>
<p>
<i>Jared Bernstein is a senior economist at the Economic Policy Institute (EPI). Lawrence Mishel is EPI's president.</i></p>
</div></div></div>Tue, 30 Aug 2005 12:23:31 +0000144803 at http://prospect.orgJared BernsteinFresh Airhttp://prospect.org/article/fresh-air
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>This may seem like a weird time for progressives to feel optimistic, but a confluence of recent events suggests the faintest breeze of hope in the air.</p>
<p>Granted, the winds of corruption and shortsightedness still dominate. More so than at any time in recent memory, high-level officials are indistinguishable from right-wing lobbyists, gutting government's ability to regulate corporate power. The Justice Department is throwing the fight against the tobacco companies; the White House is busy editing the science out of regulations that might restrain polluters.</p>
<p>Meanwhile, the administration and its congressional allies continue the fiscal recklessness that has been their hallmark since they got here. If they continue to have their way -- and they recently added a new slew of regressive tax cuts to their 2006 budget -- it will eventually be impossible for government to fulfill essential functions, from safety nets to investment in future technologies. (I know, that's the point: Starve the beast.)</p>
<p>Given this gale force of business as usual, where's this hopeful little breeze coming from? In fact, from a number of places:</p>
<p>
</p><li>Infighting: There is clearly more dissension within conservative ranks. It might be that midterm elections are within sight, and members of Congress are paying a little more attention to polls showing their popularity ratings coming in just above that of Lyme disease. There's been uncharacteristic pushback from former White House allies on George W. Bush's domestic (stem-cell research, Social Security “reform”) and foreign agendas (the war in Iraq).
<p>
</p></li><li>Speaking of Social Security, the more people learn about the president's plan, the less they like it. What's so notable here is that one of the most sophisticated and heretofore successful spin machines in the history of politics has been unable to sell the public on the benefits of privatization.
<p>
</p></li><li>A counter-theme is evolving. As these political phenomena are unfolding, leading newspapers have been providing a critically important “back story” regarding trends in economic inequality and mobility. A theme -- moving away from risk shifting and back to risk sharing -- is emerging.
<p>The subject of this theme surfaced in 2004 in a prize-winning series by <i>Los Angeles Times</i> reporter Peter Gosselin (<a href="http://www.latimes.com/business/specials/la-newdeal-cover.special">http://www.latimes.com/business/specials/la-newdeal-cover.special</a>). As stated in the introduction to the series, the piece questions “[w]hy so many families report being financially less secure even as the nation has grown more prosperous. The answer lies in a quarter-century-long shift of economic risks from the broad shoulders of business and government to the backs of working families. Safety nets that once protected Americans from economic turbulence -- safeguards like unemployment compensation and employer loyalty -- have eroded or vanished … . The result is a daunting "New Deal" for many working Americans -- one that compels them to cope, largely on their own, with financial forces far beyond their control.”</p>
<p>And remember, Gosselin wrote this before Bush was offering future Social Security recipients the chance to play the stock market with what would otherwise be a guaranteed pension. </p>
<p>More recently, <i>The New York Times</i> and <i>The Wall Street Journal</i> both ran series on, among other things, the sharp increase in income inequality and the lack of income mobility (including the amazing factoid that there's more economic mobility in France, Canada, and Denmark than in the United States).</p>
<p>In other words, while markets are delivering less equitable outcomes, the rules and norms that formerly offset those outcomes have eroded.</p>
<p>It just may turn out that the failure to sell Social Security privatization is the tipping point where enough people say, “Enough, already” to the risk shifting that underlies the conservative agenda.</p>
<p>The final hint I have that help may be on the way comes from the words of someone who not only gets what the risk-shifters are up to but can talk about it in some of the most compelling ways I've heard in decades. </p>
<p>Here's the way it looks to Senator Barack Obama, from a graduation speech he gave a few weeks ago. There are those, he says, who believe:</p>
<blockquote><p>“ … That the best idea is to give everyone one big refund on their government --divvy it up by individual portions, in the form of tax breaks, hand it out, and encourage everyone to use their share to go buy their own health care, their own retirement plan, their own child care, their own education, and so on.</p>
<p>In Washington, they call this the “ownership society.” But in our past there has been another term for it: social Darwinism -- every man or woman for him or herself. It's a tempting idea, because it doesn't require much thought or ingenuity … .</p>
<p>But there is a problem: It won't work. It ignores our history. It ignores the fact that it's been government research and investment that made the railways possible and the Internet possible. It's been the creation of a massive middle class, through decent wages and benefits and public schools that allowed us all to prosper. Our economic dependence depended on individual initiative. It depended on a belief in the free market; but it has also depended on our sense of mutual regard for each other, the idea that everybody has a stake in the country, that we're all in it together and everybody's got a shot at opportunity.”
</p></blockquote>
<p>Did someone just open the window? Where's that breeze coming from?</p>
<p><i>Jared Bernstein is a senior economist with the Economic Policy Institute, a nonprofit, nonpartisan think tank in Washington, D.C.</i></p>
</li></div></div></div>Wed, 22 Jun 2005 14:02:06 +0000144645 at http://prospect.orgJared BernsteinSunny Forecasthttp://prospect.org/article/sunny-forecast
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>An economist's view of the world generally boils down to “every silver lining has a cloud.” Our reputation as dismal scientists, fair or not, makes us especially grateful when we find something to be optimistic about. In that vein, there's one development over the past decade that makes even us feel brighter about the future: the acceleration in productivity growth. Productivity measures economic output per hour of work, and thus offers a basic measure of how fast living standards can rise. </p>
<p>Since the mid-1990s, productivity has been growing at least 1 percentage point faster per year than it was over the prior few decades. This genuinely happy news is particularly relevant to one of today's most pressing political issues, as faster productivity growth will help to fill the Social Security financing gap. </p>
<p>Now that even the president seems to understand that private accounts won't restore solvency to the system, talk has turned to tax increases, benefit cuts, and raising the retirement age. But before we go there, we need a better fix on the impact of faster productivity growth.</p>
<p>Last month, the Social Security trustees released their highly influential report on these matters. They ignored the reality of faster productivity growth, and in doing so, gave us an overly pessimistic estimate of the income that the economy will generate over the forecast horizon. </p>
<p>Starting in 2004, the trustees began basing their estimate of future productivity on the simple average of productivity growth during the last four complete business cycles, covering the years 1966 to 2000. While looking at complete business cycles is defensible (productivity varies a lot depending on where the economy is in the cycle), focusing exclusively on the past four seems rather arbitrary. The middle two cycles in their calculation -- the '70s and the '80s -- saw dismal productivity growth of 1.2 percent and 1.3 percent per year, respectively, driving the trustees' pessimistic forecast of 1.6 percent for the future. </p>
<p>Had they instead used, say, the simple average of productivity growth over the past 10, 20, 30, 40, or 50 years, they would have come up with a higher estimate. Had they used the simple average of all complete business cycles since 1947, they would have come up with a higher average. In short, based on past economic history, the trustees' numbers look far too pessimistic.</p>
<p>There's a further problem with the trustees' backward-looking method of forecasting: It fails to account for the recent productivity benefits associated with our greatly increased use of information technology. More often than not, economists are hard-pressed to explain why productivity growth waxes or wanes, but as productivity expert Dale Jorgenson recently wrote, the post-1995 acceleration of productivity is “well documented and widely understood.” This is important, because if the growth surge were a mystery, embedding it in our projections would be reckless. But given the safe assumption that our utilization of information technology will continue to enhance efficiency, ignoring the new trend is to err far too much on the side of caution.</p>
<p>Economists' confidence in the persistence of the new productivity growth regime is evident in the consensus of our productivity forecasts, all of which are well above the 1.6 percent used by the trustees. For example, Jorgenson's latest forecast for the next decade, as well as that of president's own economists, is well above 2 percent per year. </p>
<p>Due in part to this unnecessarily cautious productivity assumption, the 2005 trustees' report forecasts the 75-year actuarial deficit in Social Security as a bit over 0.6 percent of gross domestic product. A rule of thumb is that each 1-percent increase in the productivity forecast reduces this deficit by a little more than 0.3 percent, so using the Bush administration's own projections of productivity growth would reduce the Social Security shortfall by a third. </p>
<p>That still leaves a gap that needs our attention, but acknowledging the best evidence on productivity makes it seem, correctly, a lot more manageable. With faster productivity growth, we can continue to provide social insurance to our elderly, widowed, and disabled citizens, with less sacrifice than would otherwise be the case. In a debate characterized by lots of misinformation about impending crises, we shouldn't ignore this significant economic bright spot.</p>
<p><i>Jared Bernstein is the senior economist and Josh Bivens is an economist with the Economic Policy Institute, a nonprofit, nonpartisan think tank in Washington, D.C.</i></p>
</div></div></div>Mon, 23 May 2005 15:07:55 +0000144445 at http://prospect.orgJared BernsteinTax and Interdependhttp://prospect.org/article/tax-and-interdepend
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>
It's tax day, and the mind drifts to interdependent utility functions.</p>
<p>Back in grad school at Columbia, we slogged through microeconomics, learning how individuals sought to “maximize utility,” which roughly translates into becoming as fulfilled as possible, given various constraints. The optimal economy, we learned, was one in which economic agents, or “people,” sought to promote their own well-being. We didn't just take this at face value, though; we constructed pristine mathematical models that proved it.</p>
<p>Government, in these models, was generally something of a villain. Taxes inevitably created distortions in behavior that stayed the invisible hand. They created “deadweight losses” and led people to work less, or work more, or some combination thereof. Later, our textbook allowed that some amount of taxation was justified in the sense that there are a few “public goods” that we desire but that the market can't or won't provide. But I think it's fair to say that their training leads many economists to view taxes as a necessary evil at best.</p>
<p>Long ago, I stumbled upon a paper by economist Lester Thurow that sparked my impressionable mind. He raised the question (at least this is how I remember it many years later): What if our economic happiness is based not solely on our own well-being but on that of others? What if “utility” is interdependent -- if my happiness depends on yours? </p>
<p>Of course we feel that way about our families and friends, but Thurow carried it further, writing about income distribution itself as a public good. Maybe it was because I was a bedraggled, undernourished grad student, but I remember feeling a powerful sense of excitement, as this theory connected me to my fellow travelers in a way that traditional economics seemed to shun. </p>
<p>Suffice it to say that this is not the sentiment of the land as we pay taxes (or file for extensions) today.</p>
<p>Instead, we have a president who ran for his first term in office on the campaign slogan that the budget surplus was “your money,” and if he were elected he'd give it back to you. And he did, especially if you were already pretty well-heeled.</p>
<p>Now, we're faced with annual budget deficits upward of $400 billion, due in large part to the Bush administration's aggressive and ongoing tax-cutting mania. We're told we've got to slash programs that the least advantaged among us depend upon, like Medicaid, adult education, and food stamps. And the administration makes these arguments while <a href="http://www.prospect.org/web/page.ww?section=root&amp;name=ViewWeb&amp;articleId=9335">calling for further regressive tax cuts</a>, costing as much as $2 trillion over the next 10 years. </p>
<p>Thanks to Senate Democrats and a blessed few Republican stalwarts (Senators Olympia Snowe, Mike DeWine, George Voinovich, and Lincoln Chafee), the proposed budget cuts are being debated in that chamber, but the House has already voted to make the estate-tax cut permanent. Let's not gloss over this: Tom DeLay and Co. want to demonstrate their fiscal rectitude by cutting food stamps while refusing to accept a compromise on the estate tax that would ultimately exempt all but the richest 0.3 percent of estates. </p>
<p>Maybe the argument just comes down to whose well-being you care about; that is, with whose utility function do you “interdepend”? One could make utilitarian arguments that food-stamp recipients are more plentiful that multimillionaires, or economic arguments that they need the money -- or at least the food -- more. </p>
<p>But I'd like to suggest a broader perspective. We can change one word -- simply delete one letter -- in the Bush 2000 slogan and forge a message for tax day that might recreate that same sense of connectedness to the rest of America that I felt that day in the Columbia library. Not “it's your money,” but “it's our money.”</p>
<p>I'm not suggesting that we should jump for joy on April 15 because we have the opportunity to invest in our interdependence. But I am saying that we might want to think of our tax system as a conduit through which we strengthen our connections to one another, our communities, and lift the prospects and opportunities of the least fortunate among us. </p>
<p>Obviously a lot has to change before we can count on our resources being used in this way. And conservative policy-makers, with their focus on individualism and privatization, have been pushing back hard against these very types of connections. </p>
<p>But, as I sign our check to the IRS, I can't help but think that the spirit of interdependence is hovering over these selfish times, patiently waiting to be tapped.</p>
<p><i>Jared Bernstein is the senior economist and Josh Bivens is an economist with the Economic Policy Institute, a nonprofit, nonpartisan think tank in Washington, D.C.<br /></i></p>
</div></div></div>Fri, 15 Apr 2005 16:50:47 +0000144446 at http://prospect.orgJared BernsteinBallad of the Beast-Starvershttp://prospect.org/article/ballad-beast-starvers
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>In early 2005, the Bush administration released its budget for fiscal year 2006 (which goes from October 2005 to September 2006). And, for the first time, the Bush administration serves up big spending cuts. So it's worth checking out for whom the axe falls. In addition, the longer-term priorities of the administration and its backers are just under the surface. </p>
<p>First, the short-run impacts, primarily spending cuts to human services programs, have gotten the most attention. But the long-run implications are particularly worrisome. Lurking behind these reams of tables and numbers is a mission to significantly shrink government. </p>
<p>The problem is this: We are collecting too few revenues to meet our spending obligations. Unless we make big changes, the magnitude of the imbalance between what government takes in and what it's slated to spend grows to unsustainable levels. Eventually, we will either have to raise more revenue to meet our commitments or very noticeably reduce those commitments. The cuts we're arguing about today will pale by comparison.</p>
<p>This revenue/spending point is critical, both for historical context and to fend off partisan arguments. Federal tax revenues as a share of gross domestic product (GDP) were 16 percent last year -- their lowest level since 1959 -- while federal spending was not particularly high in historical terms. In fact, between 1975 and 2003, federal spending relative to GDP averaged 21 percent; last year, it was 20 percent. </p>
<p>A particularly misleading argument is that we're overspending on domestic programs. The Center on Budget and Policy Priorities is the best source for speaking truth to power on these issues; its website is a treasure trove of information on the president's budget. CBPP puts it this way: “[R]ecent domestic spending increases come in a distant fourth as a cause of the current deficit, well behind tax cuts, spending increases for defense, homeland security, and operations in Iraq and Afghanistan, and the economic downturn.”</p>
<p>Due in large part to the massive tax cuts enacted since 2001, we've choked off our revenue stream. Yet, we're still devoting about the same share of our economy to federal spending. That was the story of Bush's first term.</p>
<p>Things are shaping up differently this time. The administration claims to have gotten serious about deficit reduction and has constructed a budget that allegedly cuts the deficit, albeit temporarily. Predictably, they do so exclusively by cutting spending. In fact, the budget calls for further tax cuts amounting to $1.4 trillion over the next 10 years -- over $2 trillion if you include fixing the alternative minimum tax; this fix is highly likely, since by 2010 the AMT is expected to hit 33 million taxpayers (about one-third of all returns, compared with less than 5 percent in recent years).</p>
<p>A few years ago, conservative activist Grover Norquist bragged that his agenda was to “starve the beast” of government spending. But the beast-starvers did not count on the Bush administration to be both so open to new spending and unconcerned about deficits.</p>
<p>It has thus taken a little longer for the starving to commence. The federal government is still spending about the same share of the economy as ever, but the administration knows that will have to change. As economists point out, “Unsustainable trends can't be sustained.” The question is: How will they be reversed?</p>
<p><b><i>What's Being Cut?</i></b></p>
<p>According to analysis by CBPP, the president's budget proposes a 16 percent ($214 billion) cut in domestic discretionary spending between 2006 and 2010, outside of homeland security. Among other areas, these cuts are slated to occur in education, training, and income security. It is estimated that as many as 300,000 working poor could lose food stamps; the same number of children are projected to lose childcare subsidies. Cuts in education services to adults would affect 470,000 persons. As many as 671,000 could fall off the roles of the WIC Program (a nutrition and health program for women, infants, and children); 370,000 fewer households could get Section 8 housing vouchers; and 360,000 could lose low-income home energy assistance. Head Start slots could fall by 90,000 by 2009.</p>
<p>Turning to entitlements, the president's budget cuts Medicaid by $45 billion on net over 10 years (the budget proposed $60 billion in cuts and $15 billion in increased spending), in part by enforcing stricter rules on how states finance their share of the program (Medicaid is a federal/state match -- if the Feds give less, the states either have to pony up more or cut services). According to the Coalition on Human Needs (CHN), in 2010, “[T]he funds lost to states would be enough to provide health coverage to 1.8 million children.”</p>
<p>Given these long-term fiscal constraints, these cuts could be only the beginning. For the Norquists of the world, they cause the beast to miss a meal or two; they don't starve it. So they float a few other ideas to create more lasting attacks on federal spending. Here are three techniques for putting the starve function on autopilot.</p>
<p><i>Budget Reconciliation</i>: As CBPP analyst Sharon Parrot notes, this is a process in which Congress sets a multiyear deficit target and moves legislation on a fast track to make cuts in entitlement programs to meet the target. In practice, the various committees that determine spending levels are instructed to cut a set amount from the programs over which they have jurisdiction. The larger the reduction targets, the bigger the program cuts. Parrot warns that “[t]he House has been trying to use this fast-track budget-cutting process for several years, and so far the Senate has stopped them. But … with the elections safely behind congressional leaders, this is more likely to happen.”</p>
<p><i>Entitlement Caps</i>: This is a backup if lawmakers don't slash sufficiently in reconciliation. If entitlement costs (excluding Social Security) are projected to exceed the cap, Congress must pass legislation to stay under cap or across-the-board cuts are made automatically.</p>
<p><i>Block Grants</i>: Most of us know this approach through welfare reform, which became a block grant in 1996. Entitlements, such as food stamps and Medicaid, do not undergo annual appropriations because, by law, they have to expand or contract to meet the needs of those who qualify for the program. Block grants, on the other hand, are chunks of money that undergo annual appropriations and are sent to the states to cover specific program functions. They give states more flexibility, but they set up a chopping block that did not previously exist.</p>
<p>The two most important messages in the current budget are:</p>
<ol><li>Sorry, folks. We really think stuff like education, job training, food stamps, and childcare are important. We just don't have the resources to help.
</li><li>Watch out ahead! This budget path we're on is unsustainable.
</li></ol><p>We're not supposed to notice that the administration, with Congress's approval, is responsible for these problems. And we're supposed to be resigned to the fact that our diminished revenue outlook means belt-tightening. Forget national priorities like health care, education, and housing -- can't afford 'em.</p>
<p>The current operative agenda has two components: (1) Put the budget on an unsustainable path; and (2) Take tax increases off the table. Lawmakers then throw up their hands in despair, claiming they have no choice but to slash and burn.</p>
<p>But the president's budget goes beyond this: It calls for billions more in tax cuts. And not included in the budget are costs of the ongoing war; fixing the AMT; and, biggest of all, over $750 billion of borrowing necessary to partially privatize social security. Even ignoring these, the Congressional Budget Office finds the budget would add $1.6 trillion to the national debt, of which $1.4 comes from making the Bush tax cuts permanent.</p>
<p>There needs to be a “plan B” that includes tax increases. According to CBPP, we could get much of the way to 75-year solvency in Social Security simply by reversing the tax cuts that go to the top 1 percent (75-year financing shortfall: $3.7 billion; 75-year cost of permanent tax cuts to top 1 percent: $2.9 billion). The cost of these high-end tax cuts is about what the Feds spend on education and a lot more than we spend on housing and urban development. According to CHN, repealing the estate tax would hit a few multimillionaires, but it would return the resources needed to pay the full costs of No Child Left Behind and the Individuals with Disabilities Education Act for 10 years.</p>
<p>Once we contemplate going back to historical levels of revenue collection (remember, we're at the lowest level since 1959), the ideological chains that bind us fall away, and the possibility of using government to meet a different set of priorities reemerges. </p>
<p>The larger point is that budgets represent our social priorities. They are national statements about the depth of our connection to each other, or lack thereof. Conservative policymakers, with their focus on individualism and privatization, have been successful in breaking these connections; this budget is a case in point. We should rebuild these connections around broadly shared principles and values that strengthen the common good and lead to a far more unified society.</p>
<p><i>Jared Bernstein is a senior economist at the Economic Policy Institute in Washington, D.C. </i></p>
</div></div></div>Tue, 15 Mar 2005 20:39:35 +0000144356 at http://prospect.orgJared BernsteinCrunching Numbershttp://prospect.org/article/crunching-numbers
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>
Just in case you missed it, the central economic problem of our time was revealed on January 28 at 8:30 a.m.</p>
<p>On that chilly morning, the government released two reports that, taken together, capture a critical imbalance embedded in our economy. We learned that the nation's gross domestic product, our most comprehensive measure of economic performance, grew 4.4 percent last year, the best year for GDP growth since 1999. A second report, on employers' costs, revealed that inflation-adjusted wages, on average, fell slightly for the year, the first time that's happened in more than a decade.</p>
<p>Thankfully, the jobless recovery is behind us. In 2004, we added employment in each month, the first year that's happened since 1999. But now we've got a new problem: For many workers, real wages are falling. </p>
<p>The overall average, as noted, slipped only slightly, by 0.2 percent. But this overlooks the evolving distributional dynamics: Real hourly wages were flat or falling for the bottom 70 percent of women and 80 percent of men. Even the real hourly wages of college-educated workers fell by 1 percent. (Sylvia Allegretto, Isaac Shapiro, and I examine these wage trends in detail in a forthcoming paper.)</p>
<p>Only those at the top of the wage or education scale caught a break: The 95th percentile hourly wage was up 1 percent, as was the wage for those with advanced degrees. It's also the case that average compensation -- including fringe benefits -- was up last year (by 1.1 percent), but that was due to rising health costs. Such increases neither boost take-home pay nor help the 47 percent of the workforce without employer-provided health care.</p>
<p>While we're on the subject of burgeoning inequalities, another tidbit in the GDP report warrants mention. Personal income got a huge boost in the fourth quarter from a $33 billion dividend payout to Microsoft shareholders, the largest such payout in history. This doesn't boost the GDP (it's scored as a reallocation from profits to dividends), but it shows you that there's some money out there. It's just sloshing around at the top.</p>
<p>Big dividend payouts are great for the small percentage of households that live off their stock portfolios. But for that the majority of families that depend on their earnings, sliding hourly wages mean that they must work more hours if they're going to lift their incomes. That's possible now that we're adding jobs, but the rate of employment growth is too slow. While many analysts crowed about the fact that payrolls expanded by 2.2 million over the course of 2004, the growth rate that year -- 1.7 percent -- was well below the historical average of 2.9 percent. Had that historical rate prevailed, we would have added another 1.4 million jobs over the year.</p>
<p>This problem showed up in the GDP report, too. As my Economic Policy Institute (EPI) colleague Josh Bivens reported, by this point in the average recovery, total compensation was up 17.5 percent in real terms; in this one, it's up 7 percent.</p>
<p>So we've achieved respectable overall economic growth, but it's hardly feeding into wages. What's going on?</p>
<p>The late, lamented jobless recovery is part of the explanation. There's still residual slack in the labor market, and thus little pressure on employers to bid up wages. The situation was roughly similar at this stage of the 1990s expansion, but real wage trends were soon to reverse as we began the trek toward the full-employment conditions that prevailed at the end of the last cycle. It's possible that we could eventually get back there again, but that's unlikely to occur in the near term. Even the congenitally optimistic White House economic forecasters are expecting 175,000 jobs per month in 2005, 40 percent below the historical average at this point. More importantly, with the Federal Reserve busy raising interest rates, the path back to full employment is even steeper.</p>
<p>But there's an explanation for these embedded inequalities that goes deeper than near-term trends. The economic dynamics and policies that lead to faster growth are in place, but those that ensure that the growth is equitably distributed are missing. Our leading policy-makers know how to use monetary and fiscal policy to boost growth, but when it comes to distributing the fruits of that growth, they're either clueless or uninterested.</p>
<p>It was not always thus. We used to have a set of institutions and policies in place -- unions, minimum wages, a commitment to full employment, a stronger safety net -- that promoted a more equitable distribution of income and wealth. But somewhere along the way, conservative forces built a consensus that these institutions were killing the golden goose of market outcomes, which, once unfettered, would deliver prosperity for all.</p>
<p>Are such institutions compatible with global capitalism in the 21st century? We (EPI President Lawrence Mishel and I) consider this such a critical question that we plan to spend our next few “Econ Chamber” columns discussing it. In a sense, the answer to this question gets to the heart of the debate for the soul of the Democratic Party. It determines whether to promote centrist New Democrats who accept the dominant consensus or more traditional Democrats who challenge it.</p>
<p>It may seem like a stretch to draw all this out of a couple of starchy government statistical reports before 9 a.m. on a Friday. But sitting here a few days later, I'm convinced that's what the numbers are trying to tell us.</p>
<p><i>Jared Bernstein is a senior economist at the Economic Policy Institute in Washington, D.C.</i></p>
</div></div></div>Fri, 04 Feb 2005 17:03:30 +0000144265 at http://prospect.orgJared BernsteinStates of Fluxhttp://prospect.org/article/states-flux
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>Don't despair, progressives. I bring a message of hope, and it comes from those renowned laboratories of democracy: the states.</p>
<p> I just returned from the annual meeting of the Economic Analysis and Research Network, or EARN, as we call it around here. EARN is a collaboration of progressive state-level organizations engaged in research and advocacy, and the message from this year's meeting was crystal clear: If anything good happens, it's going to happen in the states.</p>
<p>The Economic Policy Institute helps to run the EARN network, and its director here at EPI is Michael Ettlinger. Michael was kind enough to grant me an interview for this story (translation: I mugged him at the water cooler).</p>
<p>Michael's case -- that the states are where the action is -- builds off the contention that the next four years promise to be especially tough here in Washington. Many of the resources of nationally oriented groups will be consumed by pushing back against really bad ideas like social-security privatization and making the tax cuts permanent. It's hard to imagine that we'll be playing much offense.</p>
<p>On the other hand, there are some very good ideas -- discussed below -- percolating in the states (and some very bad ones too, of course). Michael argues that these ideas have two potentially important payoffs. First, they can improve the economic fortunes of those they reach. Higher minimum wages, better education, access to health care -- if any public entity can deliver these over the next few years, it's highly unlikely to be the feds.</p>
<p>Second, these actions set the stage for a counterattack on the notion that government is nothing but a negative force. (Remember President George W. Bush's assertion that John Kerry's health plan had to be bad news because it came from government? And remember Kerry's staunch -- and disingenuous -- denial that government had anything to do with it?) Mike's hope is that "policies that solve people's problems will be coming from the states." And maybe this can help restore faith in government solutions.</p>
<p>Even a brief survey of what's going on in the states is beyond my scope in this context, but here are a few choice examples:</p>
<p><b>Minimum Wages:</b> We all know that Nevada and Florida, two red states, both overwhelmingly voted to raise their minimum wages, even though opponents outspent progressives by at least two to one, and Bush carried both states. And as if to send a message that EARN is on the right track, as I was writing this piece, an e-mail flashed across my screen with the news that the New York State legislature just overrode<br />
Governor George Pataki's veto of a higher state minimum; Washington, D.C., also<br />
followed suit, with a two-step increase up to $7. If that isn't enough, my 82-year-old Democratic-activist mother called last weekend to ask me if I thought Arizona was ripe for a minimum-wage fight (I couldn't see why not).</p>
<p><b>Health Insurance:</b> On November 2, California came pretty close to passing a "pay or play" health insurance initiative that would have required employers to either provide health coverage for their workers or pay into a state fund to purchase private care for those without employer-provided coverage. The proposition lost 51 percent to 49<br />
percent, as advocates were heavily outspent by business interests. But supporters of the plan are well aware of how close they came, and they will be back -- especially if the number of uninsured in the state continues to climb.</p>
<p>It's widely known that the California electorate bucked Bush<br />
Administration policy when it voted to invest public dollars in stem cell research. Less well known is that they approved an additional 1 percent tax on income<br />
over $1 million in order to fund mental health services for children, adults, and seniors who are either uncovered or whose insurance fails to cover mental health. Raising taxes to fund mental health is not exactly at the heart of Bush's second-term agenda.</p>
<p><b>Unemployment Insurance:</b> Although long-term unemployment remains a significant problem, congressional Republicans have blocked recent efforts to extend UI benefits. At the state level, however, a movement is underway to reshape and update the program to conform to the realities of today's workforce. Twenty states have agreed to count recent earnings when determining eligibility for UI benefits, one of the best ways to increase access among low-wage workers and those with less labor market experience.</p>
<p>While Bush's Labor Department was busy reducing the right to overtime pay, more states agreed to provide UI benefits to part-time workers and to those who left their jobs to escape domestic violence. And regarding overtime, several states, led by Illinois, are decoupling from the federal wage and hour laws to preserve overtime rights for the employees who lose under the new federal rules.</p>
<p>Some other hot policy areas to watch are paid family and medical leave (the federal version comes without pay), initiatives in early childhood education, economic development, and the type of work supports associated with welfare reform (like subsidized child care).</p>
<p>That's the good news.</p>
<p>The bad news is that conservative activists are not content merely to control all the branches of the federal government. They're just as active at the state level. Part of their efforts are, of course, digging into deep pockets to fight against all of the above, but they're also proactive. One of their goals is to privatize publicly provided services (including education), but they've also been busy blocking the high road by passing preemption laws on minimum and living wages, identifying certain groups (e.g., temp workers) as ineligible for UI, and -- shudder -- promoting TABOR initiatives (the so-called "taxpayer bill of rights"). These measures typically restrict a state government's ability to raise revenues, regardless of need or circumstance. Colorado passed such a measure in 1992, limiting revenue growth to that of population growth plus inflation and requiring voter approval for any new tax or debt increase. TABOR was, as noted by the Center for Budget and Policy Priorities: "...the main reason why...two detailed, 50-state studies in 1999 and 2001 ranked Colorado's finances as among the worst-managed in the country." The measure also left the state unable to enact necessary countercyclical policies to deal with <a href="http://www.cbpp.org/3-17-04sfp-pr.htm">the recent downturn</a>.</p>
<p>So yes, in the coming years the states are going to be the laboratories for useful experiments with policies that might solve some of our economic and social problems -- problems likely to be exacerbated by what comes out of Washington. Of course, some labs are staffed by mad scientists, and we'll have to play defense at all levels of government.</p>
<p>But our backs won't always be against the wall, and why not use these coming years to figure out what works best? Those lessons can then inform a national progressive agenda that inspires our base and beyond.</p>
<p><i>Jared Bernstein is a senior economist at the Economic Policy Institute in Washington, D.C. Sujan Vasavada and Amy Chasanov provided helpful research for this article. For more information on EARN, go to <a href="http://www.earncentral.org">www.earncentral.org</a>.</i></p>
</div></div></div>Tue, 14 Dec 2004 16:08:02 +0000144121 at http://prospect.orgJared BernsteinIt's Still the Economy, Stupidhttp://prospect.org/article/its-still-economy-stupid
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>There are many lessons to be learned from the 2004 election, but one that the conservative pundits are sure to glean is that “It's not the economy, stupid.” </p>
<p>That's what that other George W. (i.e., Will, on ABC's <i>This Week</i>) said a few weeks before the election. “That's what we've learned. … the American economy is now so well run and so resilient and so productive, it's hard to dislodge it from wealth creation, and we've gone on I think to worry about other things.”</p>
<p>Oregon's Democratic governor, Ted Kulongoski, quoted in <i>The New York Times</i>, put it this way: “The Republicans are smarter. They've created … these social issues to get the public to stop looking at what's happening to them economically. What we once thought -- that people would vote in their economic self-interest -- is not true, and we Democrats haven't figured out how to deal with that."</p>
<p>This is no small matter. Is it possible that one of the areas in which the left has its greatest contribution to make will no longer be decisive in political races?</p>
<p>While the economy did play a smaller role in this election than in the past, these commentators are mistaking unique factors for enduring ones, and are thus extrapolating far beyond reality. Here are six reasons to question their assertions.</p>
<p><b><i>1) Concerns about economic conditions got crowded out by terrorism and war.</i></b><br /><br />Regardless of where they started, George W. Bush and company quickly turned almost every discussion back to September 11 and Iraq. There was little on the economy at their convention, and, when such matters came up during the debates, the president was on particularly shaky ground. Remember when he called No Child Left Behind a jobs program (as did Dick Cheney)? </p>
<p>
Will and others have a point when they argue that the economy mattered less this time, but that says nothing about the next time. It depends on the context and on the ability of the candidates to direct the debate toward their strongest issues.</p>
<p>
<i><b>2) And, in fact, the economy still broke through. </b></i><br /><br />The much-referenced <a href="http://www.cnn.com/ELECTION/2004/pages/results/states/US/P/00/epolls.0.html">National Election Exit Poll (NEP)</a> shows that 20 percent of those polled chose “economy/jobs” as the most important issue in the election, making it a close second after “moral values” (22 percent). Terrorism and Iraq scored 19 percent and 15 percent, respectively. Those who chose “economy/jobs” broke heavily for the Democrats, with 80 percent voting for John Kerry, versus 18 percent for George W. Bush. (The shares were exactly the opposite, interestingly, for “moral values”; while many have correctly pointed out the need to unite the two areas -- economy and values -- such numbers suggest that these camps among the electorate are pretty far apart.)</p>
<p>
<i><b>3) The economy improved over the last year: The Republicans successfully asked, “Are you better off than you were four</b></i> months <i>ago?” </i><br /><br />When they did discuss the economy, the Republican strategy was to avoid looking back four years and to highlight a much shorter retrospective. While Democrats stressed the fact that Bush was likely to be the first president since Hoover to preside over net job losses, the other side pointed to close to two million jobs created since last fall. Essentially, they told the electorate: “Ignore the depth of the hole you're in, and focus on the fact that you're finally climbing out.” </p>
<p>
<i><b>4) The economy didn't have traction because people are doing better than we thought.</b></i><br /><br />The Economic Policy Institute's <a href="http://www.epinet.org/content.cfm/bp154">analysis</a> showed that once you take account of job and earnings losses, tax cuts, and health care costs, middle-income families are slightly worse off than they were in 2000. Same for mother-only families and younger families. </p>
<p>
As usual, families whose economic conditions had worsened broke strongly for the Democrat. In fact, among the lowest-income families, Kerry did significantly better than Al Gore had in 2000. But there's a unique development here having to do with debt. More so than in past periods of weak wage and income growth, families have used debt to keep their consumption percolating (home equity cash-outs helped too). With interest rates on the rise, these elevated debt burdens will eventually bite, but this dynamic blunted the impact of income losses.</p>
<p>
<b><i>5) Bigger problems, fewer solutions.</i></b><br /><br />For the economy to influence the election, voters have to believe that their candidate has the ideas and ability to go after the problems they face. True, some voters will blame the incumbent for whatever trends evolved on their watch, but that's probably not enough.</p>
<p>
Yet this election failed to deliver a convincing set of ideas to deal with the big economic problems we currently face. The challenges invoked by globalization and technological change are ongoing if not escalating, yet beyond the standard response -- more education -- the candidates never offered a very persuasive response. Add offshoring, the longest jobless recovery on record, and the development of bubbles in key markets, and I wonder if the electorate just failed to hear ideas that won their votes on these issues. (I'd score Kerry's health care plan as a notable exception, and the NEP shows he beat Bush solidly on this issue.) </p>
<p>
<i><b>6) Was Kerry an ineffective messenger on economic issues? </b></i><br /><br />There is some serious blaming the messenger going on among political analysts, but I thought he hit hard and pretty effectively on the economic problems facing the nation. He may not have been the best communicator on the issues, but, if he lost votes here, it was likely due more to a lack of convincing solutions (see #5) than for failing to get out the message. (According to the NEP, a larger share of the electorate trusted Bush rather than Kerry to handle the economy, but put me down as skeptic as to the reliability of this result.)</p>
<p>
So what would it take for Will and others to be correct when they claim that the economy doesn't decide elections anymore? For that to hold, the reasons elaborated above would have to be permanent fixtures of our social and economic landscape. In fact, most are quite unique, with the first one -- war and terrorism -- at the top of the list (note the assumption that we don't wage perpetual warfare). Similarly, the extent to which debt and increased home equity drove consumption during this period of falling real incomes, the reversal of job losses last fall, and, of course, the messenger himself, were also unique. </p>
<p>
On the other hand, the need for compelling solutions has been with us for years, and it's clear that you need more than good ideas. You have to explain them in a way that reaches and convinces those hurt by the economic challenges that confront us. </p>
<p>
It's still the economy, stupid. Democrats just need to be smarter about it.</p>
<p>
<i>Jared Bernstein is a senior economist at the Economic Policy Institute in Washington, D.C.</i></p>
</div></div></div>Mon, 15 Nov 2004 17:53:11 +0000144061 at http://prospect.orgJared Bernstein